India File: What the Adani crisis means for India
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26 Nov - By Ira Dugal, Editor Financial News, with global Reuters staff.
Greetings from Mumbai!
This week on the India File, we focus on allegations against Adani group founder Gautam Adani. Does this latest crisis create new risks for India's economy? I'd be interested in your views. Please write to me at ira.dugal@thomsonreuters.com.
Meanwhile, the rupee has been tumbling from one record low to the next, prompting more aggressive measures to keep the currency stable. More on that in "Market Matters".
And the ruling Bharatiya Janata Party wins a landslide victory in provisional elections in the pivotal state of Maharashtra, strengthening its political position.
THIS WEEK IN ASIA
** 'No one will win a trade war,' China says after Trump tariff threat
** Japan plans $90 billion spending in new stimulus package, document shows
** IMF approves third review of Sri Lanka's $2.9 billion bailout ** Australia dumps plan for fines for social media giants enabling misinformation
INDIA AND THE ADANI CRISIS
Billionaire Gautam Adani and the sprawling Adani group are facing another crisis less than two years after they were targeted by U.S. short seller Hindenburg Research, which knocked $150 billion in market value from the group's listed companies.
The allegations this time came from U.S. prosecutors, who indicted Gautam Adani for his alleged role in a $265 million bribery scheme that aimed to secure solar power approvals from Indian officials. The group has denied any wrongdoing.
Read here to know more about the allegations, the defendants in the case and suspected disclosure lapses on the part of the Adani group.
With Gautam Adani himself at the centre of the latest allegations, the entire group faces "key man" concerns. Adani's dominance in the domestic infrastructure sector, moreover, has put India's government and lenders in a tough spot, Reuters BreakingViews columnists wrote.
A top risk for India is what may happen to the group's funding. Global bankers have turned cautious since the indictment and S&P said funding access could be impaired and borrowing costs pushed higher.
French oil major TotalEnergies, with shareholdings in Adani Green and Adani Total Gas, has paused fresh funding to the group.
While Indian banks' exposure to the group is currently at comfortable levels, they too are limited by regulations that cap exposure to any single corporate group.
Hasnain Malik, emerging market equity strategist at research firm Tellimer Insights, sees other potential problems as well.
"The case may pose a risk to foreign investor appetite for Indian assets," he said, noting there had already been a sharp drop in foreign flows into Indian equities this year. What's more, he said, the indictment could give leverage to the incoming Trump administration in trade negotiations.
TOO BIG TO IGNORE?
As Gautam Adani led the Adani group's phenomenal rise, the first-generation entrepreneur also led it into a number of controversies, including opposition from climate activists to its Carmichael coal mine in Australia and a political outcry over the Dharavi slum redevelopment project in Mumbai.
For years, a number of Indian economists have also warned about the concentration of economic power in the hands of a few industrial houses.
Back in 2021, India's former chief economic adviser Arvind Subramaniam and former IMF representative to India Josh Felman called out the Narendra Modi government's strategy of creating national champions, including the Adani and Ambani groups, which could crowd out potential growth for other companies.
But that did not slow the champions' advance.
The Adani group has cornered large market shares in key infrastructure segments - from ports and airports, where it controls close to a quarter of India's capacity, to solar manufacturing, where it holds a 53% share of India's installed photovoltaic cell capacity.
It plans to invest $90 billion more in infrastructure expansion over the next decade, Jefferies said in a report earlier this year. That would make it one of the largest private-sector players in the sector, which has taken off as the world's fifth-biggest economy rushes to catch up with China and others. The private sector has contributed about one-fifth of India's infrastructure spending in recent years, while overall infrastructure investment, including government money, was estimated by CRISIL Research to reach $1.8 trillion for 2024-2030.
QUOTE OF THE WEEK
"BJP's resounding win in the Maharashtra elections boosts political stability, a market sentiment positive."
Jefferies analysts on the State of Maharashtra's election results.
Prime Minister Narendra Modi's Bharatiya Janata Party won by a landslide in provisional elections in India's richest state.
Since the BJP lost its majority in parliamentary elections in June, it has focused on key state elections, winning both the farm-heavy northern state of Haryana last month and now Maharashtra, home to the financial capital Mumbai.
MARKET MATTERS
The Indian rupee has tumbled from one record low to the next over the past month, pressured by a strengthening dollar and persistent outflows of foreign investors' money.
Still, the rupee has performed better than its Asian peers as the Reserve Bank of India has stepped in to sell dollars and slow the decline. This in turn has eroded its forex reserves, which saw the sharpest decline on record in the week ended Nov. 15.
The RBI has taken its intervention to a new level, however, as it confronted persistent outflows both before and after the Adani indictment. In a rare move, the RBI also asked banks to cut their long dollar-rupee positions.
($1 = 84.4260 Indian rupees)
India's forex reserves post biggest weekly fall on record https://reut.rs/493wykT
By Ira Dugal; Editing by Edmund Klamann
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