Why Adani Crisis Is Just What India Needed

Nothing tells you more about an economy than how the government leading it confronts a financial crisis.

Take India, which is currently in the global headlines for all the wrong reasons. It would be hyperbolic to call the reckoning facing Adani Group a national catastrophe. But then, founder Gautam Adani has tried to frame his conglomerate’s $100 billion-plus loss as a “calculated attack on India itself.

On some level, the man who until recently was Asia’s richest does have a point. Since U.S. short-seller Hindenburg Research accused Adani Group of fraud on January 24, credit rating agencies, investment banks and speculators alike have taken a broader look at India’s financial system.

Rarely has India Inc. faced so much international scrutiny. And rarely has there been a better or timelier wake-up call for New Delhi to raise its economic game. Question is, will Prime Minister Narendra Modi answer it and get India’s reform process back on track?

The travails of a single company spark uncomfortable conversations when the dynamics surrounding it seem a microcosm of an economy’s biggest vulnerabilities. To this day, for example, the mere mention of Enron Corp., Yamaichi Securities, Lehman Brothers or China Evergrande Group are a kind of shorthand for corporate and regulatory failures.

For the record, I’m not suggesting any of these episodes are directly analogous to the Adani mess. All I’m saying is that the high leverage, opacity of family group companies and the perceived political connections between Adani and Modi dating back to their days in the western state of Gujarat touch on so many of the reforms New Delhi has yet to address. Hence, Adani has put an intense spotlight on Indian governance practices.

The good news, though, is that Modi’s latest annual budget could be just the pivot bankers and investors had been hoping for.

To date, many of Modi’s reform wins have been of the low-hanging-fruit variety. He’s opened a variety of sectors to increased foreign investment. He streamlined the process for entrepreneurs opening new businesses. But anyone betting on a game-changing supply-side Big Bang from the Modi era is still waiting. If only Modi went after corruption with the same intensity he does journalists trying to police India Inc.

“One of the most beautiful things about this budget is the consistency of policy,” says Alok Saigal, president of Nuvama Private Bank.

The government, Saigal says, “has laid out three or four very broad objectives for the economy. One is they have said they want to focus on infrastructure. So, the budget talks about it. They have spoken about youth and skill development so that the budget talks about it. They have spoken about green energy. The budget speaks about. They’ve spoken about education and simplification of taxation for the common man. The budget speaks about it.”

Soumya Rajan, Founder & CEO, Waterfield Advisors, adds that “there are several internal factors that are likely to contribute to robust growth in India.”

For example, Rajan says, “the private sector is poised to increase spending because of strengthened corporate balance sheets. The fiscal budget has proposed record-breaking infrastructure expenditure which is expected to lead to greater employment and recent higher tax collections will provide a cushion against the global slowdown.”

Also, Rajan adds, “80% of India’s consumption is domestic and consumer demand does remain strong amongst the affluent class, so we do see India in 2023 as a glass half-full. Moreover, with projected growth of 6.4%—as estimated by the Reserve Bank of India—in fiscal-year 2023-2024, India will be one of the fastest growing economies and is considered a bright spot.”

Though the Adani fiasco is indeed troubling, Rajan says, “it’s not a systematic risk, but a company/group-specific risk. Yes, it will have a negative impact on investor sentiment, more in terms of the governance of Indian companies, but I expect this to be temporary.”

India, she notes, “has some exceptionally well-run companies” with solid governance. Also, she adds, “our banking sector today is much more robust today than in the past, with banks well-capitalized. In particular, the exposure of the banking sector to the Adani Group is less than 1% of total gross advances of the top three state-run banks.”

Bottom line, she concludes, this is not a systemic risk. India’s robust fundamentals are here to stay.”

So is the innovative energy generating economic growth from the ground up. “The government and banking regulators got banks to clean up the mess to a large extent,” Saigal says. “And therefore you are seeing Indian entrepreneurs and companies actually getting into a strong capex cycle, which is a very positive sign.”

Having said that, Saigal says, “global outfits and global tech giants have seen impacts. India’s startup ecosystem has been impacted because of the entire funding winter that has set in.”

The good news, he concludes, “is that valuations have cooled down, especially among the startups. We’re now in a situation where valuations have corrected and are now in a reasonable range. And the good companies as always will survive and have good cashflow. If a company comes up with a good idea, it’s going to get money. And the absolutely crazy valuations are going away.”

Nor is Modi’s apparent determination to make its 10th year in power count as his team relocates its reformist mojo. And tries to convince the world that, regardless of what billionaire Adani says, India’s future is more about economic successes not reckonings.

The Adani mess offers Modinomics an opportunity to demonstrate that India is indeed ready for global prime time. In that way, the controversy may be just what Team Modi needed.