Make in India: Why didn't the Lion Roar?

“Make in India” has failed to meet its objective of turning industry around. The government has seemed more concerned with improving India’s rank in the spurious Ease of Doing Business Index, which anyway did not result in higher investment.

1 Introduction

For over two decades now, the share of the manufacturing sector in India’s GDP has stagnated at around 14%-15%; that of the larger industrial sector (which includes mining, manufacturing, power and construction) has also stagnated at around 26%-27%.

India has been showing a growing import dependence in most industries, especially in the all-important capital goods or machinery sector (Chaudhuri 2013). This  is reflected in rising royalty payments and license fees to foreign companies for industrial technologies (Mani 2018). The ominous signs were, however, ignored during India’s economic boom of 2003-08. There was a wishful belief that India’s trajectory would be as a software superpower (the world’s back office) specialising in higher value-added services. India was at the time the world’s fastest growing large economy, nipping at China’s heels.

The 2008 global financial crisis, the Great Recession, and China’s rising technological prowess put paid to India’s ambition of becoming a superpower. In response, the National Manufacturing Policy was mooted in 2011 to increase the sector’s share in GDP to at least 25% by 2022, and to create 100 million additional manufacturing sector jobs. The idea was recast in 2014 as the “Make in India” initiative with the following objectives:

• Target of an increase in manufacturing sector growth to 12-14% per annum over the medium term.
• An increase in the share of manufacturing in the country’s Gross Domestic Product from 16% to 25% by 2022.
• To create 100 million additional jobs by 2022 in [the] manufacturing sector.

Nearly five years later, what has Make in India achieved?

[W]hile the EDB rank has improved the Make in India campaign has not succeeded in increasing the size of the manufacturing sector.

The unstated premise of Make in India was that manufacturing can be made to grow only if business enterprises are freed from burdensome regulations. The argument is that investment and production are held back because business is shackled by excessive rules and procedures—such as the time taken to get permissions and the laws protecting formal sector workers. Towards this end and to showcase its deregulatory efforts, the government chose to improve India’s rank in the World Bank’s Ease of Doing Business (EDB) index, believing that a higher rank would translate into higher industrial investment and output growth. Hence, in official pronouncements, an improvement in the EDB rank was shown as emblematic of the success of the Make in India campaign. However, as we shall see, while the EDB rank has improved, the Make in India campaign has not succeeded in increasing the size of the manufacturing sector relative to domestic output.

India did well in upping its EDB rank from 142 in 2014 to 77 in 2018. Enthused by the success, the Prime Minister at the Vibrant Gujarat Summit in January 2019 said:

“From 142 in 2014 to 77 now, but we are still not satisfied. I have asked my team to work harder so that India is in the top 50 next year. I want our regulations and processes to compare with the best in the world. We have also made Doing Business cheaper” (The Hindu, January 18, 2019).

But the improvement in the EDB rank has failed to revive industry. Why? This is the puzzle that we hope to understand here.

2 Evidence on Industrial Performance

The share of manufacturing and the industrial sector in GDP are useful aggregative measures of industrialisation. Figure 1 reports the ratios for India for selected years.

Source: National Accounts Statistics, various issues

For both manufacturing and industry a word about the data. As is now well-known there have been many and in some cases inexplicable changes in the methodology and databases. The data for the years 1990-91 to 2012-13 are based on the earlier (base year 2004-05) National Accounts Statistics (NAS); the data for 2012-13 and 2017-18 are based on the new NAS series (base year 2011-12). As many changes were brought about in its methodology and the databases used, the ratios are distinctly higher in the new series, compared to the earlier one.1

Regardless of the series used, the stagnation in the manufacturing and industry-GDP ratios is pretty evident as the ratios have barely moved up. Or to put it starkly, the Make in India initiative has made little progress during the last five years.

Source: RBI Handbook of Statistics on Indian Economy

Make in India has little to show for its success in terms of output and investment growth—and a far cry from its ambitious targets.

There are three sources of national data for measuring industrial output, namely, (i) the Index of Industrial Production (IIP), (ii) the Annual Survey of Industries (ASI) and (iii) the NAS. The average of annual growth rates for the period 2013-14 to 2016-17 varies widely among them; from 3.8% in the IIP, to 8.4% in the NAS, with the ASI recording a growth rate of 5.9%.2 While the merits of each of the alternative industrial growth estimates are known and have been widely debated, what is perhaps important to note is that they are nowhere near close to meeting the Make in India targets of a 12-14% annual growth in manufacturing and 25% share in GDP.

Figure 3: Industrial Capacity Utilisation

According to the ASI, the annual growth in real fixed investment in manufacturing averaged over the three years since 2014-15 is a mere 1.5%, and employment growth is 3.7%.3 A poor industrial performance is also corroborated by related variables such as bank credit and capacity utilisation, which have decelerated over a longer period (Figures 2 and 3). These trends are also consistent with the declining aggregate (economy-wide) fixed investment and domestic saving, as proportions of GDP (Figure 4). In short, Make in India has little to show for its success in terms of output and investment growth—and a far cry from its ambitious targets.4

3 On the Rising Ease of Doing Business Index Rank

The EDB index of the World Bank, by examining the formal legal and administrative procedures required to be followed by firms for both starting and running a business, seeks among other things to measure the time taken to comply with various regulations. It then ranks the countries accordingly. The underlying assumption is that firms in developing countries suffer from excessive state regulation in various areas (including the need to protect formal sector workers) that throttles the formation of new enterprises and disturbs the running of businesses—all adversely affecting output growth from the supply-side. Often cited examples are New Zealand and Singapore, which compete for the top slot in the index, where it apparently takes less than a day’s effort to start a new business enterprise, whereas in India it is said to take, on average, 130 days.5

[T]he government of India’s single-minded pursuit to improve the EDB index rank was a futile effort to signal a reduction in the regulatory burden and enhance private investment to achieve Make in India goals.

An important premise of the EDB index is that the poor in developing countries suffer from a lack of property rights, and that this delays their ability to start businesses. This is inspired by the perspectives of De Soto (1989) and Shleifer and Vishny (1998), who came to wield considerable influence on the perspectives of international organisations.

The EDB index consists of 10 sub-indicators under various heads, such as starting a business, labour regulation, customs regulations, etc. For all the indicators, less government intervention is deemed to be better for business (with the underlying principle being that the free market is the best governing principle). EDB is a de jure, not de facto measure of the time taken for obtaining various permissions. These estimates are based on information obtained mostly from corporate lawyers, with the surveys conducted by private consultants in select large cities (only in Mumbai and Delhi in India, for instance).

Source: National Accounts Statistics, Various Issues

However, there is a growing body of literature critical of the EDB index. The World Bank’s own internal watchdog, the Independent Evaluation Group, has prominently questioned the reliability and objectivity of the index (World Bank, 2013). Comparing the World Bank’s EDB index with its own firm-level Enterprise Surveys, Hallward-Driemeier and Pritchett (2015) said,

Overall, we find that the single numerical estimate of legally required time for firms to complete certain legal and regulatory processes provided by the Doing Business survey does not summarize even modestly well the experience of firms as reported by the Enterprise Surveys. (p 123)

 More seriously, a World Bank research report has shown that there is no relationship between the changes in EDB ranking of developing countries and the inflows of foreign direct investment. To quote:

The World Bank’s Ease of Doing Business reports have been ranking countries since 2006. However, do improvements in rankings generate greater foreign direct investment inflows?...The paper shows this relationship is significant for the average country. However, when the sample is restricted to developing countries, the results suggest an improved ranking has, on average, an insignificant (albeit positive) influence on foreign direct investment inflows...Finally, the paper demonstrates that, on average, countries that undertake large-scale reforms relative to other countries do not necessarily attract greater foreign direct investment inflows. This analysis may have important ramifications for developing country governments wanting to improve their Doing Business Rankings in the hope of attracting foreign direct investment inflows. (Jayasuriya 2011: Abstract; emphasis added)

Figure 5: India’s Doing Business Rank

Source: Sandefur and Wadhwa 2018a​ (accessed on February 13, 2019)

Further, the meaninglessness of the index in terms of promoting foreign investment can be illustrated with two telling examples. Russia, like India now, improved its EDB rank from 120 in 2012 to 20 six years later, taking it ahead of China, Brazil, and India—but without seeing an improvement in investment inflows. China, on the contrary, attracted one of the highest capital inflows but its EDB ranking was low and hovered between 78 and 96 for the years between 2006 and 2017.

Note: As many private equity funds have liquidated their investments in Indian firms recently, in our view, net FDI inflow as a more appropriate measure of investment. Source: RBI Hand Book of Statistics on Indian Economy, and DIPP data on FDI inflow. 

Source: RBI Hand Book of Statistics on Indian Economy, and National Accounts Statistics, Various Issues.

Similarly, India’s rank from 2006 onwards was between 124 and 140, but in 2017 it jumped to 100, apparently on account of a few changes in the EDB’s methodology. However, if the older methodology is followed consistently, the improvement in the rank simply vanishes! (Sandefur and Wadhwa 2018a) (Figure 5). This only demonstrates the fragility of the underlying methodology. Further, for India, the evidence on the association between an improvement in the EDB index and the fixed investment rate; and between the EDB ranking and FDI inflows is very limited (Figures 6.1 and 6.2).6

Figure 7

Source: Sandefur and Wadhwa (2018a)​ (accessed on February 13, 2019).

More seriously, a recent episode exposed the ideological bias of the EDB ranking. Last year, Chile’s former President, Micheal Bachelet complained that the EDB rank for the country systematically deteriorated during her socialist presidency, while it improved during the presidency of the conservatives. On a closer perusal, it was shown that Chile’s rank did not change much over the years under the older, unchanged methodology (Figure 7). Hence it was argued that the World Bank was interfering with the methodology underlying the EDB ranking to show Chile’s socialist regime in a poor light (New York Times 2018); an accusation endorsed by Paul Romer then Chief Economist of the World Bank, and last year’s Economics Nobel laureate (Sandefur and Wadhwa (2018b).

In the light of the above, it is fair to infer that the EDB ranking is a spurious index. Therefore, the government of India’s single-minded pursuit to improve the EDB index rank was a futile effort to signal a reduction in the regulatory burden and enhance private investment to achieve Make in India goals.

4 An Illustration of the Ease of Doing Business Measure

If the EDB index’s analytical and empirical bases are so weak, why did India chose to showcase its regulatory reform efforts, expecting it to boost investment flows to achieve the Make in India goals? If actions speak louder than words, then the government was probably using the EDB ranking as a smoke screen to dilute critical labour laws and investment rules for short-term gains for enterprises. This is not to deny the scope and the need for regulatory rationalisation. However, since the regulations were often introduced to correct for market failures, any efforts at de-regulation have to ensure that they do not lead to additional social costs for enterprises and industrial workers. The evidence of the government’s actions, however, seems to suggest otherwise.

This is illustrated with the recent example of the dilution of The Boilers Act 1923 and Indian Boilers Regulation 1950 that regulate the production and use of industrial boilers as they are concerned with industrial safety. The law earlier required the boiler inspector to periodically inspect factories and certify the safety of boilers in use.

In 2016, as part of improving the EDB ranking and as part of the Make in India (as well as Make in Maharashtra) initiative, the state government diluted boiler inspection requirements by replacing the mandatory government inspection and certification with self-certification by enterprises, complemented by a “third-party certification” by specialist private agencies. To quote the official rule change:

The Government of Maharashtra is in process of rationalisation and simplification of various Labour Laws with underlying objective of ensuring ease of doing business and promote make in Maharashtra drive. Further, the endeavour of the government to ensure removal of various bottlenecks and impediments in obtaining various approaches under the Rules/Law without compromising the safety and security of the workers and peoples engaged in the various industrial processes.

The main objective of scheme [Third party Inspection-Scheme for Boilers/Economisers] is to minimise personal interface and visits of the boiler inspection officers of the Directorate of Steam Boiler without compromising the quality of services to be provided, the industrial establishment using steam boilers will now be able to opt for third party inspection scheme of boilers/economisers...Under the scheme the third party agency and competent person...shall be eligible to undertake inspection of boilers of those industrial units/establishment which have opted for scheme7

Trade bodies and employers’ associations such as the Confederation of Indian Industry (CII) hailed the EDB initiative as a progressive move. Maharashtra’s initiative has reportedly been followed in most other states.

What is the evidence on the outcome of the initiative after two years of the rule change? Apparently, none of the factories using boilers (i) have engaged third-party inspectors, or (ii) have submitted self-declaration certificate of the safety of the boilers as required—as reported by the Indian Expressquoting the state labour department officials (January 21, 2019, Mumbai edition).

Surely, for factory owners in Maharashtra, deregulation would have saved money and time spent on boiler inspection and also perhaps (the alleged and often unsaid) the cost of corruption. However, could there be a social cost associated with these private gains of deregulation? Probably yes, as the risks of industrial accidents could have risen on account of unsafe and uncertified boilers in usage. The higher risks get translated into a higher risk premium for such factories and workers working therein, raising the insurance cost for firms, and lowering safety for industrial workers. If this argument is valid, such a policy reform seems myopic for the nation as the long-term costs of running factories could go up, and industrial workers' safety gets jeopardised.

Subject to a fuller verification, this example illustrates how the government is diluting critical industrial safety laws under the guise of improving the EDB index. In other words, the government’s actions perhaps reflect its principal belief that such regulations are avoidable, as market forces would take care of industrial safety and occupational health of workers. Such faith in the virtues of free markets (or market fundamentalism), signals the ruling regime’s commitment to its political slogan, “Minimum Government and Maximum Governance.” Whether freer markets help attain the goals of Make in India seems a different matter.

5 Conclusions

Make in India is a flagship initiative launched in 2014 to raise the manufacturing sector’s share in domestic output and employment, and to enhance national technological capabilities to counter growing import dependence. After nearly five years, the outcomes of the initiative seem modest.

The policy initiative seems premised on the view that excessive regulations constrain factories and firms, hence deregulation could augment investment and output, which would now be guided by market signals. To this end, the government has sought to benchmark its regulatory reforms to the World Bank’s Ease of Doing Business Index. And India’s rank in the index did go up from 142 in 2014 to 77 in 2018.

However, this improvement in rankings failed to achieve the real objective, namely a ratcheting up of industrial performance. Why? India’s faith in the EDB index seems misplaced for many reasons. One, globally, there is no statistically valid association between the EDB index rank (and its improvements) and growth in FDI and private investment. Two, India’s rank improvement is mostly due to methodological changes; with an unchanging methodology the needle barely moved. Three, EDB is an ideologically motivated index: Chile’s EDB Index rank moved up whenever conservatives were in power, and the rank went down during the socialists’ regime.

[T]he aim of improving India’s ranking according to the EDB index was perhaps a mere facade to dismantle critical industrial and labour regulations, disregarding basic economic and social considerations such as market failures, social protection, and workers’ occupational health and safety.

This raises many issues. Why did India stake its policy credibility on a global ranking of doubtful value? One could hazard a guess that the idea underlying the index—that excessive state regulation is the principal hindrance to private initiative—is probably in line with the ruling dispensation’s economic world view, which is best captured in its political slogan “Minimum Government, Maximum Governance”. If our suspicion is correct, then the aim of improving India’s ranking in the EDB index was perhaps a facade to dismantle critical industrial and labour regulations, disregarding basic economic and social considerations such as market failures, social protection, and workers’ occupational health and safety.

Our contention is illustrated with an example of deregulation with potential downside risks for factories and workers. The Maharashtra government’s abolition of compulsory inspection of industrial boilers under the Boilers Act of 1923 by third-party inspection and self-declaration of safety conditions in 2016 is a case in point. The dilution of the law apparently resulted in no inspection at all by specialist private “third-party agents”, and zero self-declaration and certification—thus seriously enhancing risks of industrial accidents. Thus, if the Maharashtra example of deregulation gives us a glimpse of what the Make in India seems to be really about at the ground level, then national industrial progress could be in serious jeopardy.

Granting, for argument’s sake, that less regulation is a desirable end in itself, what is the evidence that such markets deliver sustained industrialisation in current times? Very little, in fact. Historically, many of the industrial and labour regulations were introduced to overcome the short-sighted behaviour of employers and to protect long-term industrial progress. After all, the safety of industrial assets and workers’ lives surely contribute to long-term productivity gains.

To answer the question posed in the sub-title of this article: The lion—Make in India’s ubiquitous emblem—didn’t roar because the policymakers lacked a strategic vision for industrialisation, and failed to make the required investments in technology and organisation. If the history of industrialisation from Japan to China is any guide, they all have followed active industrial policies to forge economic success.8 The recent industrial rise of China with the continued dominant role of state-owned firms, long-term development banks, and restrictions on FDI in high- tech industries clearly show merit in carefully targeted industrialisation efforts.

What is the rationale for such interventions? Modern industries are capital-intensive with immense scale economies. The market for industrial technologies is far from perfect since a few giant global firms dominate them. Industrial policy is not just about overcoming market failures but also about seeking to promote national capabilities in the face of highly unequal access to markets and for technologies. For developing countries to acquire such capabilities, they require considerable sustained state support for long-term finance and a conducive environment for technological learning. Surely while India needs to avoid past mistakes, it needs to build on successful instances of carefully designed policies to promote efficient industries.

Hence, if policymakers are serious about Make in India, there is a need to re-discover and re-imagine industrial policy; not seek quick fixes.

The difference between Italy and Spain

Worry more about the former than the latter

It is tempting to lump Europe’s two big southern countries together. Italians and Spaniards talk loudly, eat late, drive fast and slurp down life-prolonging quantities of tomatoes and olive oil (such, at least, are the clichés). They were cradles of European anarchism in the 19th century and fascism in the 20th century; brushing dictatorship under the carpet before embracing Europe in the post-war years. During the euro-zone crisis from 2009 they were two components of the ugly acronym “pigs” (Portugal, Italy, Greece, Spain) denoting particularly indebted economies. Today once more they are being mentioned in the same breath.

Italian volatility appears to be arriving on the Iberian peninsula. Spain’s once boringly bi-party politics has become a five-party kaleidoscope with the emergence of the hard-left Podemos, the centre-right Ciudadanos and most recently the hard-right Vox. It is increasingly polarised by battles over Catalan independence. Last summer Pedro Sánchez’s centre-left Socialists (psoe), backed by Catalan nationalists, toppled a centre-right People’s Party (pp) government. But the Catalans refused to back the new government’s budget, forcing Mr Sánchez to call an election for April 28th. A right-wing coalition of pp, Ciudadanos and Vox (which would surely inflame Catalan nationalism) or a deadlock and new elections are the most likely outcomes.

It can ill-afford either. The country’s recovery belies the urgency of pension, education and labour reforms, as well as nagging corruption and a rise in trans-Mediterranean migration. Years of political instability would leave these priorities unattended. Eurocrats note that Spain last year missed more deadlines for implementing eu legislation than any other member state. The sudden emergence of Vox and its embrace by other parties (it props up a pp-led government in Andalusia) evokes at once the country’s Francoist past and alarming parallels with Italy. There, the Northern League, once a peripheral Vox-like party, now dominates a chaotic, Eurosceptic coalition that is spooking markets as decades of negligible growth make its debt pile teeter.

Yet despite all that, fundamental differences to do with national metabolism, lost on some northern European officials, separate the two countries. Italy is shackled by conservatism and stasis. Its euro-zone crisis was (and is) the mild acceleration of a long-term national slump. gdp has barely grown since the late 1990s, making a debt mountain accumulated in earlier times unsustainable. Spain meanwhile hurtles forward, having grown by almost half during that period. Its euro-zone misery was more sharp and dramatic: a hyperactive construction boom raced off a cliff during the banking crisis, causing a spike in unemployment.

The difference between slow-metabolism Italy and fast-metabolism Spain goes beyond economic statistics. Decline has been the defining Italian experience of the past decades, so the new looks threatening and unwelcome there. But Spaniards have experienced the past decades as a time of rising prosperity and freedom after the drab Franco years. They are neophiles, willing to try anything that smacks of the future. The contrast between the two countries is that between Spain’s urban spaces, which gleam with futuristic architecture and public works, and Italy’s peeling cities; between Spaniards’ openness to social change and Italians’ conservatism; between the existential melancholy of Paolo Sorrentino’s films and the freneticism of Pedro Almodóvar.

A fast national metabolism has its downsides. Some of Spain’s shiny new infrastructure is wasteful and some Spaniards, especially in rural areas, resent the pace of change and are turning to Vox in protest. But it does also make Spain’s descent into reactionary Italy-style stagnation improbable. For one thing, its economy is fitter. Spain had a deeper euro-crisis but recovered faster, thanks to drastic economic reforms and spending cuts. Exports and fdi surged. Its gdp per person in purchasing-power terms overtook that of Italy in 2017 and is forecast to be 7% higher within five years. Heavy investment in roads and high-speed rail has made Spain’s infrastructure the tenth best in the world, says the World Economic Forum. Italy is 21st.

A sunny country

All of which translates into an outward-looking optimism. Mr Sánchez, who wants Spain to become a third partner in the Franco-German alliance, is particularly pro-eu, but the pp’s Pablo Casado admires Angela Merkel’s Christian Democrats in Germany and Albert Rivera of Ciudadanos brandishes eu flags at his rallies. According to Eurobarometer, 68% of Spaniards view the eu positively compared with 36% of Italians. Vox directs its anti-establishment ire not at the eu so much as at feminists and separatist Catalans.

It also talks about immigration, but less than other European right-populist parties. Why? The foreign-born share of the population rose from 3% to 14% in the two decades to 2008, but Spaniards are more likely than any other eu population to declare themselves comfortable in social interactions with migrants (83% compared with 40% of Italians). Despite rising immigration from Africa and new efforts to improve border security, none of Spain’s main parties proposes to close ports or indulges in Mr Salvini’s brand of anti-migrant posturing. In other areas, too, Spaniards have left the chauvinism of the Franco years behind; a broad consensus backs gender equality and gay rights (equal marriage was introduced in 2005, behind only Belgium and the Netherlands).

Years of political chaos could threaten this picture. But if that applies to Spain, it applies to other European countries too, where the same fragmentation is taking place. Last year’s change of government, though fraught, was procedurally exemplary and proof that Spain’s young constitutional order now has at least the maturity of its western European neighbours. It is Italy, with its decades-old fractiousness and stagnation, that looks more out of kilter. Spain is different, goes the old saying. But Italy is more so

How HDFC breaks the dismal pattern of Indian banking

Its growth and profits put it in an elite global club

Indian banks have a poor reputation—and for good reason. The state-controlled ones offer cheap credit to the well-connected, have piles of bad loans and are barely accountable. Nor are the private ones flawless. In the past year the bosses of two of the biggest left after concerns were expressed by the Reserve Bank of India: at Axis Bank because of credit problems and at Yes Bank because of governance worries. The head of the second-largest, icici, stepped down because of a scandal involving loans to a firm whose shareholder had dealings with her husband.

In this dismal scene one bank, hdfc, consistently shines. In the coming days it is expected to announce the latest in a series of stellar performances. Profits are expected to be around 20% higher than last year. Return on assets is 1.8% and return on equity is around 17%—excellent for a bank. The share price is 286 times what it was in 1995, when the firm went public—and 132 times its 1995 level in dollars. The bank’s market value is over $90bn, and Goldman Sachs thinks that it could exceed $200bn by 2024. That would gain hdfcadmittance to a global elite now made up of American and Chinese behemoths.

hdfc Bank is an offshoot of a mortgage company of the same name (the initials stand for “housing development finance corporation”), which was set up in 1977 by Hasmukh Parekh, the chairman of icici’s board. Mr Parekh persuaded his nephew, Deepak Parekh, then at Chase Manhattan Bank, to return to India to run the new company. In 1994 Deepak obtained a licence for a new bank and recruited people with experience similar to his own to run it—that is, Indians who had worked in big global banks. The chief executive, Aditya Puri, came from Citi; staff from Bank of America, anz Grindlays, Deutsche, Barclays, Standard Chartered and many others were also hired.

He was initially hesitant about the move from Citi, says Mr Puri. At the time Citi seemed well-placed to become a dominant force in Asian finance. It and the other global banks in India had advanced products, good service and talented employees. But with hindsight it is clear that he made the right call. Though Citi retains a local business in many Asian countries, it largely serves a high-income niche. Most of the other foreign banks have retrenched and focused on cross-border transactions.

The global banks were not wrong about the size of the opportunity. In the Indian market, says Mr Puri, “demand is not an issue”. A vast segment of the population was unbanked or underbanked—not just individuals, but also small businesses.

At first hdfc Bank focused on large corporate customers, where its newly hired staff’s contacts were useful. The recruits from global banks brought valuable know-how with them. Notably, it did well in niches where Citi was strong, such as credit cards. It beefed up its technology and gained the scale needed to press into the mass market. Mr Puri says hdfc can now process a personal loan and put money in an account in 11 seconds. And it expanded its business offering to sophisticated areas, such as the payment mechanisms of India’s stock exchange.

It also sought to serve small companies previously excluded from the financial system. In February it opened its 5,000th branch, giving it by far India’s largest private-bank network. Equally important are the 30,000 employees who promote phone-based banking to shops and individuals in smaller cities and villages. Among the most prominent of these marketers is Mr Puri. Though he owns neither a mobile phone nor a computer, he has begun showing up in far-flung regions to sell the bank’s services to small shops. These make more profitable customers than is generally understood, he says, since their entire financial lives are within the bank’s system and they are easy to cross-sell to.

Of great interest to India’s business community is what comes next for hdfc. Indian law requires bankers to retire at 70; that gives Mr Puri a little over a year more in the job. Corporate bosses can stay until 75, so there may be a way to find him another five years. Plans are in place for both eventualities, he says. Romesh Sobti, who turned round another private bank, IndusInd, is also nearing retirement. The departure of a successful leader is always a ticklish moment—even more so in India’s harsh banking scene.

America wants to challenge rogue petrostates

But it cannot squeeze Iran and Venezuela without risking higher oil prices for its own consumers

AMerica has been a superpower for decades. As an energy superpower, however, it is barely a teenager. As recently as 2015 it was illegal to export oil. Within ten years the shale boom has transformed it into the world’s biggest producer of crude. No longer must it tiptoe around regimes whose policies it detests but whose oil it craves. President Donald Trump touts an age of “energy dominance”. He has put its burgeoning energy prowess to the test with tough sanctions on Iran and Venezuela. But dreams of dominance are running into the realities of energy markets.

On April 22nd the American administration announced that no further waivers would be granted to countries importing oil from Iran. “We are going to zero,” declared Mike Pompeo, the secretary of state. Waivers to eight countries, granted in November, were due to expire on May 2nd. Even so, investors were shocked that no exceptions were allowed. According to the state department, Saudi Arabia, the United Arab Emirates and America will help meet demand. But Brent crude, the international benchmark, quickly topped $74, the highest level in nearly six months.

The Trump administration is right to make to make a fuss about America’s oil boom. According to the International Energy Agency, by 2021 the country may be a net exporter of oil. This would be a stunning reversal. Not long ago, notes Amy Myers Jaffe of the Council on Foreign Relations, a think-tank, oil imports were the largest cause of America’s current-account deficit.

Mr Trump announced last May that America would impose sanctions on Iran and withdraw from the deal on international oversight of its nuclear capacity signed during Barack Obama’s presidency—the “worst deal ever”, as Mr Trump liked to call it. He urged the Organisation of Petroleum Exporting Countries (OPEC), privately and on Twitter, to boost production to help restrain oil prices. Saudi Arabia duly did so, increasing output by 600,000 barrels a day from June to November, when the sanctions were to take effect.But it is wrong to think it can bring about dramatic change in two petro-states without risking dramatic spikes in petrol prices. (Those concerned about climate change might welcome expensive oil; Mr Trump is not one of those people.) America’s government does not control its oil industry. Oil firms are backed by investors whose interests do not necessarily align with those of the president. Nor can it control the world’s many buyers and sellers of crude. American production accounts for about 15% of global output, a striking increase from what it was but still a small share of total supply. Complicating matters, investors have struggled to anticipate the Trump administration’s actions. Rather than stabilise oil markets, America has been as likely to do the opposite.

At the last minute, however, Mr Trump announced that eight countries would be exempt from the waivers for six months—including China and India, the biggest importers of Iranian oil. Investors and Saudi Arabia were caught off guard. The kingdom requires oil at around $80 a barrel to meet its budgetary needs; in December Brent prices sank to $51. OPEC and its allies scrambled to cut production and shore up prices. In December they said they would decrease output by 1.2m barrels a day.

The next sanctions came in January, after opponents of Nicolás Maduro’s ruinous regime in Venezuela declared Juan Guaidó, the head of its national assembly, the legitimate leader. America recognised Mr Guaidó and unveiled sanctions to choke off the country’s oil company, Mr Maduro’s main source of cash. “America now appreciates that energy is a source of foreign-policy strength rather than a vulnerability,” says Meghan O’Sullivan, a former adviser to George W. Bush and a professor at Harvard University. But using that strength effectively can be difficult.

Sanctions on Iran and Venezuela have yet to produce the desired effect. Mr Maduro still clings to power. Iran has met none of Mr Trump’s demands. Its crude exports have fallen by about half since Mr Trump said America would withdraw from the nuclear deal last year, but they remained well above zero in March, at about 1.4m barrels a day, according to Kpler, a data firm (see chart). China, in particular, has continued to import Iranian oil. The announcement that waivers will expire seeks to change that. Countries that continue to import Iranian oil, the state department says, could be cut off from America’s banking system.

This manoeuvre is risky, says Helima Croft of RBC Capital Markets, an investment bank. Iran’s foreign ministry is threatening to retaliate by closing the Strait of Hormuz, a major export channel for the region’s crude. With little left to lose, it may stop allowing international inspectors to monitor its nuclear programme. Oil markets, too, face uncertainty. Prices were already rising, because of plunging output in Venezuela and civil war looming in Libya. The state department has not said how soon America might impose sanctions on countries that continue to import Iranian oil. China may do so—an official from its foreign ministry declared that China “opposes the unilateral sanctions”. That could complicate a bilateral trade dispute that had looked close to resolution.

The number of rigs drilling in America has risen since the start of the year, as the oil price has climbed. Yet American shale oil is mostly “light”. Refineries in America and elsewhere are thirsty for heavy crude, because Venezuela’s production of the stuff has dropped and demand for distillates made with it is strong. There is a “fundamental mismatch” between the type of crude the world increasingly wants and what America is pumping, says Bernadette Johnson of Drillinginfo, a research firm.

Much therefore depends on whether Saudi Arabia boosts production, as the Trump administration hopes. After last year’s flip-flops, it may be reluctant to move fast. OPEC and its partners have their next formal meeting in late June. Even if Saudi Arabia were to ramp up production quickly and dramatically, analysts debate how long that boost could be sustained. A recent bond prospectus for Saudi Aramco, the kingdom’s oil giant, disclosed that a famous oilfield is ready to sustain production of 3.8m barrels a day, about 25% less than analysts had assumed.

Neil Beveridge of Bernstein, a research firm, points out that OPEC’s spare capacity could drop dangerously low as Iran’s production falls and Saudi Arabia works to ramp up. That would leave the oil price vulnerable to supply shocks—if fighting in Libya escalates, for instance. America, the energy adolescent, can certainly roil oil markets. But it is unable to control them.

Big carmakers are placing vast bets on electric vehicles

From GM and Geely to Mitsubishi and Mercedes, giants of the industry are making battery-powered plans

in three cars on American roads ran on volts. Then oil began gushing out of Texas. Cheaper than batteries, and easier to top up, petrol fuelled the rise of mass-produced automobiles. Cost and worries about limited range have kept electric vehicles (evs) in a niche ever since. Tesla, which has made battery power sexy again in the past decade, produced just 250,000 units last year, a fraction of what Volkswagen or Toyota churn out annually. For every one of the 2m or so pure evs and plug-in hybrids, which combine batteries and internal-combustion engines (ices), sold in 2018, the world’s carmakers shifted 50 petrol or diesel cars.

ev sales are, however, accelerating as quickly as electric motors themselves. Some industry-watchers reckon that they will account for nearly 15% of the global total by 2025. By then, one in five new cars in China will run on batteries, according to Bloomberg New Energy Finance, a consultancy. The chief reason such optimistic forecasts no longer look outlandish is the entry into the electric race of the car industry’s juggernauts. A survey by Reuters in January put the industry’s total planned ev-related spending worldwide (including on batteries) at around $300bn over the next five to ten years. From gm and Geely to Mercedes and Nissan, big carmakers all want to turn out millions of such cars—and turn a profit doing so. Their strategies range from cautious to headstrong.

in three cars on American roads ran on volts. Then oil began gushing out of Texas. Cheaper than batteries, and easier to top up, petrol fuelled the rise of mass-produced automobiles. Cost and worries about limited range have kept electric vehicles (evs) in a niche ever since. Tesla, which has made battery power sexy again in the past decade, produced just 250,000 units last year, a fraction of what Volkswagen or Toyota churn out annually. For every one of the 2m or so pure evs and plug-in hybrids, which combine batteries and internal-combustion engines (ices), sold in 2018, the world’s carmakers shifted 50 petrol or diesel cars.

ev sales are, however, accelerating as quickly as electric motors themselves. Some industry-watchers reckon that they will account for nearly 15% of the global total by 2025. By then, one in five new cars in China will run on batteries, according to Bloomberg New Energy Finance, a consultancy. The chief reason such optimistic forecasts no longer look outlandish is the entry into the electric race of the car industry’s juggernauts. A survey by Reuters in January put the industry’s total planned ev-related spending worldwide (including on batteries) at around $300bn over the next five to ten years. From gm and Geely to Mercedes and Nissan, big carmakers all want to turn out millions of such cars—and turn a profit doing so. Their strategies range from cautious to headstrong.

Making a profitable, mass-produced ev has proved elusive. A battery powertrain can be three times the price of an ice. But a combination of better technology and greater scale may soon allow evs to compete on price with petrol vehicles, and enable motorists to drive long distances without the fear of running out of juice.

They had better, carmakers are hoping. Worries about climate change and air pollution are prompting authorities around the world to consider phasing out new petrol and diesel engines in the coming decade. In the absence of federal regulations under America’s climate-sceptical president, Donald Trump, some progressive cities and states there are tightening local rules. Fiat Chrysler (whose chairman, John Elkann, sits on the board of The Economist’s parent company) has just agreed to pay Tesla hundreds of millions of euros to count the Californian marque as part of its fleet, and thus avoid steep fines for exceeding average CO₂-emissions standards for carmakers due to come into force in the European Union next year. In China, where half the world’s evs are already sold, the government sees the electrification of transport as a way to combat choking urban smog—and to overtake the West technologically.

Western premium brands appear best positioned to take an early lead. While batteries remain pricey, fancy marques can offset the cost with the higher prices that their vehicles command. Jaguar and Audi have already broken Tesla’s monopoly at the lucrative top end of the market. Daimler, which owns Mercedes, has committed €10bn ($11.3bn) to its eq range and wants 20% of its cars to be fully electric by 2025.

Daimler and bmw, which has been bruised by losses on its poorly selling i3 electric hatchback, are hedging their bets by backing platforms—the basic architecture of a car—that are able to accommodate petrol and diesel engines as well as electric motors. This should help them contain costs, by avoiding duplication, but involves compromises over battery size and layout. Sacrificing range and interior space in this way may dent brands built on luxury and technological prowess, says Patrick Hummel of ubs, a bank.

Many mass-market firms are likewise proceeding cautiously. Their thinner margins leave less room to absorb the cost of batteries. Renault of France and South Korea’s Hyundai are nevertheless toying with the idea of a dedicated electric-only platform. psa Group has said it plans to electrify more Peugeots, Citroëns and Opels. Fiat Chrysler has made similar noises, though the Tesla tie-up suggests its near-term plans are less ambitious. Toyota’s early bet on hydrogen fuel cells, which lag behind batteries on the road to widespread adoption, had long been a distraction. The Japanese giant has now acknowledged that buyers want battery power. It is planning ten models by the early 2020s.

The most daring by a long way is vw. The German group’s heft—it produces 10m cars a year—affords it economies of scale only Toyota could hope to match. The €30bn vw plans to spend on developing evs over the next five years, plus €50bn to fit them with batteries, leaves all other carmakers in the dust. In March Herbert Diess, its chief executive, promised 70 new electric models by 2028, rather than 50 as previously pledged, and 22m evs delivered over the next ten years. The company is contemplating a huge investment in a “gigafactory” to supply its own batteries rather than depending on outside suppliers.

vw is already developing a dedicated platform and converting entire factories to ev production. The first, at Zwickau in Germany, will eventually turn out 330,000 cars a year for the vw brand as well as Audi and seat. Its medium-sized id hatchback, to be shipped next year, will cost around €30,000, similar to an equivalent diesel-powered Golf, and travel 400-600km (250-370 miles) on a single charge. On April 14th in Shanghai Mr Diess unveiled a sport-utility vehicle to compete with Tesla’s snazzy Model x in China from 2021. Once the range of evs reaches full production in 2022, vw believes, such models will start breaking even. By 2025, when it hopes one-quarter of its output will be electric, they should be as profitable as petrol cars.

As Mike Manley, boss of Fiat Chrysler, observers, it is no longer a question of whether carmakers can supply a fleet of evs but whether people will pay for them. If governments withdraw generous subsidies which ev-owners have enjoyed, charging infrastructure fails to materialise or electric cars’ pitiful resale value does not increase, motorists may be reluctant to switch to battery power. Poor sales, combined with the large upfront investments, would hit carmakers’ margins, which for mass-market brands are already about as exciting as a Soviet-era Trabant in mud brown. The financial consequences could be “ugly”, warns Bernstein, an equity-research firm.

Electric field

At the same time, the big carmakers can expect more competition from rivals unburdened by complex ice supply chains and large workforces. vw has 40,000 suppliers worldwide and directly employs 660,000 people. Lower capital intensity, and the relative simplicity of evs, which use many fewer parts than petrol vehicles and are easier to assemble, is drawing in upstarts. They include Dyson, a British maker of vacuum cleaners, and a series of Chinese Tesla-wannabes, such as nio and Byton. Bigger Chinese carmakers, such as Geely and jac, have also developed expertise in evs. With domestic sales stalling, they are beginning to eye export markets.

Other technological bumps are meanwhile starting to test the industry’s chassis. Self-driving cars and ride-sharing are forcing companies to rethink their established business model. Investing in evs now leaves them with less to spend on adapting to everything else. They may be hoping that the electric race will serve as a practice lap for wider oncoming disruption.

Blain: "Why Is The World's Richest Company Raising $12 Billion?"

After the IMF cuts its global growth outlook to slowest since crisis, its going to be an interesting day with the Fed not really telling us what it might really think, and the ECB trying to fool us that “these are not the droids we’re looking for” as they get set to pump prime the ailing Eurosphere through further monetary experimentation. (With the American’s about to impose tariffs on Yoorp’s  helicopter exports, perhaps the ECB should consider buying any surplus birds? Since zero rates have had zero effect, maybe direct money dropped from above will…)

Elsewhere, the EU clocks up a tactical win against UK by granting a further Brexit extension. Political analysts are trying to figure what this does to UK politics: will May be replaced as leader of the Selfservatives, and/or will political gridlock precipitate an election, resulting in a Labour minority supported by a greedy SNP? New Years day sounds like a damn stupid day for a UK exit into thin markets. It looks like we’re in for further Sterling-Brexit uncertainty. Joy.. oh joy…

Let's see this big bond story:

ARAMCO

There will be thousands of disappointed fixed income investors this morning… gutted about their low allocations on the Aramco Saudi Oil deal. The $12 billion deal attracted a book of over $100bln – meaning most hopeful investors will be scaled back to effectively zero. As the world’s largest and most profitable company, I am sure most fund managers will justify their attempted purchases of the Aramco bonds with mumble-swerve about the need for “portfolio-exposure-balance” and “index-tracking/matching”.

The Saudis will be delighted with the reception for the bonds and the apparent rehabilitation of the country after last year’s “unpleasantness. The investment banks leading the deal will be pleased and happy with their fees. For the life of me I can’t understand what’s to like about this deal. The risk reward – the 10-year benchmark priced at 105 over US Treasuries – might look good to yield tourists, but from my perspective it doesn’t properly factor Saudi risk. There is massive execution risk in Saudi paper… and I don’t mean a sword in the central square.

What did investors think they were buying?

Aramco made 111bln profit in 2018, and would be the largest company in the world if floated. Moody’s gives Saudi Aramco a A1 rating, stable outlook and admits it has all the characteristics of a Aaa rated company. Its got scale, downstream integration, strong financial flexibility, the lowest cost structure of any oil producer, and minimal leverage. It’s got exclusive access to the largest oil and gas reserves. It does oil very well. There are a few negatives like geographic concentration in Saudi and oil volatility.

But the key issues investors seem to have missed in terms of implications is contained within Moody’s comment: “Aramco is (100%) wholly owned by the state and is expected to remain under government ownership even after any potential IPO in the future….”

Let’s consider what that really means for the Credit.

Last year we got hints of what’s to come when Aramco bought SABIC, (Saudi Basic Industries) the state wealth fund – putting $70 bln into state coffers. The delay/cancellation of the planned Aramco IPO means Saudi ruler, Prince Mohammed Bin Salman, is left with limited funding options for the critical transformation of Saudi from tribal oil state into a modern technologically diverse society. Folk have asked why Aramco, the world’s richest company, is raising $12 bln. Because… MBS is going to lever it up to pay for Saudi’s future.  Effectively Aramco is going to be MBS’s piggy bank.

Now that could have been a good thing. When he came to power MBS was hailed as a reformer – letting women drive and opening cinemas, blahbity blah blah. That didn’t last long. In a very short time MBS went from saviour to despot. First, he took the country into an ill-advised war which his military was unprepared for with rebels in Yemen. Then he shook down the country’s richest businessmen to fund his “vision”, (and the same day bought a luxury yacht). 6 months ago Saudi was untouchable, pilloried by global opinion for the state-sanctioned brutal pre-meditated murder of dissident journalist Jamal Khashoggi. World Leaders refused to be seen with the Kingdom’s ruler and snubbed his Desert Davos.

MBS is not the product of Western Universities with an educated liberal streak – he’s been raised and educated to be an absolute monarch with traditional Saudi values – which pretty much equates with “wahhabi, mercurial autocrat and an approach to problems who out-Trumps Trump”.

However, Saudi’s problems didn’t start with MBS. They have been brewing for years as the bloated multi thousand princes making up the royal family consumed most of the oil revenue, leaving the bulk of the population underemployed and living on the fringes. The Saud royal family deal with the tribes was always: we’ll take the money and keep you comfortable. That is breaking down. MBS needs Aramco to fund the modernisation of his kingdom, run economic and social reform, innovate new technologies and diversify the economy beyond oil.

That’s a massive investment execution risk, and he only has a few short years to put it all in place: the major cities are surrounded by sink estates of unemployed Saudi youth hooked on state handouts and highly susceptible to radicalism. Officially unemployment is 13%, but underemployment across Saudi Society is much higher after years of oil subsidy. Youth unemployment was recently cited by Brookings as high as 42%! Educational standards and achievements are very low outside the top strata of society. Meanwhile, Saudi wobbles politically trying to retain US support, its regional allies, while Iran hovers on the doorstep. Add a level of political risk to the equation.

The execution risk of Saudi Arabia being able to transform itself – which is the real risk investors who piled into the 30-year Aramco bond are taking – is huge.

And it gets even bigger with you add in the ESG perspective – Environmental, Social and Governance. Saudi’s human rights record is abysmal. Its starving political prisoners in its jails, is willing to shakedown business leaders and ignore the rule of law, is blockading counties like Qatar that disagree with them, and dropping some of the most sophisticated and expensive weapons available on unarmed civilians in neighbouring Yemen. I  could go on to talk about Jared Kushner and the culture of patronage clientism, but I’m sure most people already get it.  

For whatever bizarre reasons investors pledged over $100 bln of orders into the $12 bln of bonds Aramco sold yesterday. Much of the demand was for the long-end 30-yr bonds. Bearing in mind likely social, educational, and political issues facing Saudi as its attempts to transition its economy into something diverse, vibrant and sustainable, it’s a long-term investment picture that looks… well, frankly risky. Some would say about as much sense as buying Argentina 100-year bonds.

I’m really struggling to find anything positive to say about the Aramco deal.

The unprecedently strong demand for MBS’s private slush fund exposes the myth that everyone wants to be seen to be supporters of ESG investment, and that Green and Socially aware investment is where your financial advisors are investing your savings. Boll-Chocks. The brutal reality is more money was voted into proxy Saudi oil risk over two days of marketing than will go into environmental charities over the next hundred years.