Geopolitics is shrinking India’s risk premium

MUMBAI, May 9 (Reuters Breakingviews) – Indian tycoons and financiers are sitting back as global business comes to them for a change. Apple (AAPL.O) CEO Tim Cook, Microsoft (MSFT.O) boss Satya Nadella and Blackstone (BX.N) President Jon Gray have all visited India this year. They are lured by a country whose potential as an alternative investment destination to China increasingly outweighs the local challenges of doing business.

Visitors see many attractions. India’s $3 trillion economy is forecast to grow by 6.5% this fiscal year, continuing to outpace the rest of the world. Plentiful imports of cheap Russian oil are keeping inflation in check. Meanwhile, the workforce of the world’s most populous country offers low costs, high numbers of technology engineers, and hundreds of millions of people who speak English.

Executives and investors also see a business-friendly government that is likely to remain in power for the next half-decade. Opinion polls suggest Prime Minister Narendra Modi will win a third term next year: the biannual Mood of the Nation survey, published in January, found 72% of respondents rated Modi’s performance as good, up from 66% in August. If he wins re-election with an outright majority, businesses would not have to worry about unpredictable coalition politics.

Yet India is also benefiting from worsening relations between Washington and Beijing. Companies are looking to shift supply chains out of the People’s Republic, while money managers need a place to deploy long-term funds with fewer risks of financial sanctions.

In some cases, the pivot is stark: Apple suppliers Foxconn (2317.TW) and Pegatron (4938.TW), for example, are building factories in Karnataka and Tamil Nadu. JPMorgan analysts reckon India will make one in four iPhones within two years, even though manufacturing costs are higher than in China. Ontario Teachers’ Pension Plan, Canada’s third-largest retirement fund, closed part of its China equity investment team based in Hong Kong in April, seven months after opening an office in Mumbai.

India appeals as more than a manufacturing base, though. Its economy also dangles the promise of Chinese-style growth. GDP per capita was $2,379 in 2022, less than one fifth of its eastern neighbour. Over 1.2 billion people have mobile phone connections; half of which are smartphones. Morgan Stanley analysts and strategists expect India to become the world’s third-largest economy and stock market before the end of the decade.

India remains a tricky destination for international companies and investors. New Delhi has a long-standing fondness for import tariffs and is infamous for wrangling over tax with multinationals including Vodafone (VOD.L) and energy group Cairn.

This has not prevented others from enjoying success, though. Blackstone has assets worth $50 billion in the country. The U.S. firm led by Stephen Schwarzman is the country’s top owner of office and retail real estate, while India represents half its Asian private equity investments. The $3.8 billion of total capital in its Blackstone Capital Partners Asia I fund has earned a net internal rate of return of 29%.

India has traditionally wanted for overseas funds: it attracted 1% of the world’s foreign direct investment in 2021, compared with 9% for China and Hong Kong combined, according to the United Nations Conference on Trade and Development. Yet in a twist of fortunes, executives who spoke to Breakingviews now worry about overheating.

Heightened interest from investors will further push up prices in a country where stock valuations are already at a premium: the MSCI India Index trades at nearly 20 times one-year forward earnings, against 12 times for MSCI’s broader Emerging Markets benchmark. The arrival of large pools of capital ready to snap up real estate, hospitals and other assets will force existing investors to take on more complicated projects to maintain returns.

India is an easy place to miscalculate, too. Despite the prevalence of English and a powerful diaspora which includes the bosses of Alphabet (GOOGL.O) and Microsoft – two of the world’s four biggest companies by market capitalisation – the South Asian nation’s business environment remains poorly understood by many outsiders.

That was demonstrated earlier this year by the precipitous crash in stock prices of companies controlled by Gautam Adani following an attack by a short seller. While a good number of clients of top Indian and Wall Street institutions had largely steered clear of the tycoon’s listed vehicles, index compiler MSCI (MSCI.N) had given the conglomerate a 5% weighting in its India benchmark.

And while homegrown conglomerates like Adani and Mukesh Ambani’s Reliance Industries (RELI.NS) highlight the business potential of meeting India’s need for infrastructure and consumer goods, they also promise cutthroat competition. That’s one reason multinationals eager to plant a flag in the country – including TotalEnergies (TTEF.PA), Meta Platforms (META.O) and Foxconn – are teaming up with domestic players.

Growing concerns about China may be prompting investors to discount Indian risks. For example, executives and money managers reckon New Delhi can straddle the geopolitical divide without being punished by the United States, its top trading partner, while continuing to import energy and weapons from Russia.

Capital providers are looking past high-decibel domestic politics too. They are largely undeterred by opposition leader Rahul Gandhi’s recent disqualification from parliament following his sentencing in a defamation court case brought by a lawmaker from Modi’s Bharatiya Janata Party. An official probe against the BBC for alleged foreign exchange violations, which came after the British broadcaster released a critical documentary about Modi, was met with muted international condemnation.

Finally, investors and executives calculate that inequality between India’s rich and poor, a jobs market where less than half of the urban workforce has regular employment, and supply-chain inefficiencies resulting from poor infrastructure will either be resolved by market forces, or simply won’t impinge on their investments.

Ultimately, India’s increasing importance as an alternative to China gives investors a growing incentive to focus on what the South Asian country can offer, while paying less attention to past barriers. The India risk premium is rapidly disappearing.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

Editing by Peter Thal Larsen and Thomas Shum

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