When economic strategy is centred around ‘national champions’

In a Foreign Affairs article titled ‘India’s Stalled Rise: How the State has Stifled Growth’ a year ago, former Chief Economic Adviser (CEA) Arvind Subramanian and Josh Felman, a former IMF representative in India, warned of the dangers of the government ‘stacking the deck’ in favour of certain corporations to build them up as ‘national champions’ to achieve rapid industrialisation. Subramanian and Felman alluded to the South Korean chaebol strategy and the Japanese zaibatsu to explain what the Narendra Modi government was seeking to do in India.

“Perhaps the most distinctive aspect of Modi’s industrial policy is its promotion of companies that have acquired a dominant position in particular sectors of the economy,” they wrote, “…The arguments for it are well known. With government assistance, favoured companies can achieve huge economies of scale, create networks, and help pursue national economic goals.”

The Modi government had centred its ‘national champions’ strategy on the Adani Group and Reliance Industries, Subramanian, who was CEA from 2014 to 2018, wrote. He noted that Reliance Jio’s low-cost 4G cell phone network roll-out was a positive outcome of that strategy and conjectured that “the 2As (Adani and Ambani)” could also “help India meet its climate goals, since they are both making large investments in renewables.”

But, the authors noted, “Overall…the strategy has undermined the objective of improving the investment climate”. They also warned that “The (the?) cumulative impact of the national champions approach could be more serious in India than elsewhere because Adani’s and Ambani’s conglomerates have interests that extend throughout the economy…By backing the 2As…the government is encouraging an extraordinary concentration of economic power.”

No one in government or among India’s regulatory and law enforcement agencies paid attention to the former CEA’s warnings. The Adani Group went about its debt-fuelled acquisitions of projects and companies and the valuations of its companies hit stratospheric levels throughout 2021 and 2022.

Gautam Adani became the world’s third richest man, behind only Elon Musk and Jeff Bezos – until Hindenburg Research put out on January 24 its damning report, ‘How the World’s 3rd Richest Man is Pulling the Largest Con in Corporate History’!

Now, Adani, and the Modi government, must reckon with a ‘Before Hindenburg’ era and an ‘After Hindenburg’ era. Such has been the immediate impact of the tiny New York-based short seller’s report investigating the business practices of the Adani Group. And its long-term effects haven’t even begun to play out.

Consider this: Before Hindenburg, the Adani Group’s market valuation had risen from $7 billion in 2014 to some $236 billion by the end of 2022. After Hindenburg, more than $150 billion of that market value was wiped out in just over a month. That’s more than the $120 billion capital expenditure the Centre has budgeted for the whole country for 2023-24. And, we may not have seen the end of it yet — Hindenburg had said Adani stocks had been overvalued by 85%.

You may think, oh, but that’s only a loss of notional value, not real value; the real value is still the assets that Adani holds. You would be partly right. But think of what it has done to Adani’s ability to push ahead on the infrastructure and green energy build-out that it had promised.

For a start, as its stocks fell, Adani had to withdraw its proposed Rs 20,000 crore FPO (follow-on public offer) at the very last minute — even after being ‘rescued’ by what Bloomberg columnist Andy Mukherjee called “India’s brotherhood of billionaires.” That money, if it had materialised, was meant to upgrade by March 2024 at least three of the six airports that Adani had acquired (having been allowed to bid for them by changing the extant rules); repay debts of group companies; and invest over Rs 2,600 crore in Adani’s promised green hydrogen production. All of these are stalled now, unless Adani can find the money for them.

Adani subsequently also shelved a planned $122 million bond issue. It has halved its revenue target, cancelled plans to buy a coal plant in Madhya Pradesh, put expansion plans on hold to conserve cash, and is repaying and prepaying debts — $1.1 billion to retrieve pledged shares; $500 million, because banks became reluctant to refinance the debt — to convince the world that it does not have liquidity or solvency issues (and it may not. After all, if Hindenburg is right about the round-tripping of funds, there may be more where it was coming from earlier. The question is, where was it coming from?).

Indeed, Adani and his leadership team will continue to be in damage repair mode for weeks and months to come, selling coal and equity at discounted rates, running a series of meetings to convince overseas bondholders from whom the group has borrowed more than $8 billion, and, according to foreign media reports, hiring one of America’s most expensive law firms to fob off potential legal problems and a NY-based public relations firm to help it with crisis communications. The costs for all this and the cash requirements to keep operations going at group companies arise just as the era of cheap money — when the group had it good — has ended and borrowing costs are surging.

We need not worry about Adani’s travails. Thanks in part to policies that favoured the group, it has real assets — ports, airports, coal, power plants, etc — that can help it tide over its difficulties. What should worry the nation, though, is the impact it will have on national ambitions and missions in infrastructure and green energy that the Modi government tied to Adani’s fortunes.

As mentioned earlier, Adani’s infrastructure plans have already taken a hit. The group’s troubles will also hit the nation’s green energy ambitions and thus India’s ability to fulfil its ‘net zero carbon emissions by 2070’ promise. When the going was good, Adani had declared ambition to lead the charge and invest $70 billion in green energy over the next few years, including a multibillion-dollar green hydrogen project with France’s TotalEnergies. In the wake of the Hindenburg report, Total has put that project on hold. In addition, Norwegian pension fund KLP has dumped its entire shareholding in Adani Green Energy believing that Adani has channelled its funds into the group’s Carmichael coal mine in Australia.

Hindenburg has made it difficult for Adani to access western capital, especially green and ESG capital. And the effect may be felt economy-wide. As a Barclays Plc analyst report noted: “The scale and economic inter-linkages of the Adani businesses make it relevant to discuss what any pullback in the group’s investments could entail for the economy as a whole. A disruptive outcome of the situation or a sharp pullback in the group’s investments could have implications for India’s capex cycle.”

‘Champions’ or ‘Cronies’

Building up ‘national champions’ to speed up the nation’s industrialisation is a legitimate, though not ideal, strategy for a government, especially when private sector investment is not coming in from elsewhere. Indeed, while raging against the Opposition in parliament for pointing to his close ties with Adani, the Prime Minister seemed to acknowledge and justify that strategy, without mentioning Adani. “The Congress only engaged in tokenism and never tried to find permanent solutions to the problems facing the country,” Modi said. “To build modern India, we have focused on creating infrastructure with scale and speed.”

The trouble starts when ‘friends’ are built up into ‘national champions’, governments bend or reframe rules to enable that, and regulatory and investigative agencies take that as a signal to ignore business practices even when something does not seem quite right.

If the Hindenburg report bears out fully – as it has on the overvaluation of stocks – the Adani juggernaut has rolled so far as a complicated structure and a complex mechanism of dressing up stock-market relevant factors, such as cash flows, profits, etc. of the group’s listed companies to shore up their stocks, which were then pledged to borrow money, or by issuing bonds against real assets obtained through favourable government policies. The shoring up of share values – stock manipulation and fraud – Hindenburg has documented, was done by moving funds and assets from a number of offshore shell companies based in Mauritius, Cyprus, Dubai, etc., to a number of unlisted entities that were channeled into the group’s listed companies. If this complex mechanism comes to a halt post-Hindenburg, the juggernaut will slow down, as it has to a large extent already. Then, what happens to the government’s plan “to build up infrastructure at scale and speed”?

And we have not even got to the real questions that have arisen out of the Hindenburg report yet: Whose money was it that it said was flowing to and from Mauritius and other offshore destinations into the Adani Group, through 38 shell companies? Why haven’t SEBI, ED, CBI, DRI, etc., made an attempt to find out? The government claimed to have shut down over four lakh shell companies since 2017. How did these 38 survive and thrive?