- Economist
As growth slows and
reforms falter, economic activity is shifting out of India
Aug 10th 2013
INDIA’S
diaspora of 25m people is something to behold. In colonial times Indian
labourers and traders spread across the world, from Fiji to the Caribbean. A
second wave of Indians left between the 1970s and mid-1990s, when the economy
was in a semi-socialist rut. Migrant workers rushed to the Persian Gulf and
South-East Asia, then booming. Educated folk and entrepreneurs fled to the rich
world. Plenty struck gold, including engineers in Silicon Valley and Lakshmi
Mittal, boss of ArcelorMittal, a giant steel firm. Often they now have little
to do with India beyond sending cash to relatives and groaning as the
once-vaunted economic miracle fades.
Yet
alongside this distant diaspora, a network of people and places is more
directly engaged with India’s economy. Its most conspicuous element is the plutocrat
who owns firms in India, but like his Russian and Chinese peers shops in Paris,
educates his children in America and Britain and sometimes has foreign
citizenship: Cyrus Mistry, the boss of Tata Sons, India’s biggest firm, has an
Irish passport. At the network’s core, however, is not the gilded elite but
offshore hubs, including Dubai and Singapore, often with sizeable Indian
populations and with their own economic strengths.
The
idea that some things are better done abroad is hardly new. Hong Kong was a
gateway to imperial and then Red China. In 1985 Yash Chopra, an Indian
film-maker, led a trend of shooting Bollywood “dream sequences”—in which the
hero and heroine sing amid meadows and snowy crags—in Switzerland. The Alps
were easier, cheaper and safer than the more familiar location of Kashmir.
Film
buffs now view Swiss dream-sequences as cheesy, but India’s big offshore hubs
are more in fashion than ever. They present a mirror image of India’s red tape,
weak infrastructure and graft. Dubai is a prime example. For long-haul flights
Indians prefer its airline, Emirates, to their own. More than 40% of long-haul
journeys from India go via a non-Indian hub, often in the Gulf. Indian airports
no longer make grown men cry (Delhi’s is first rate), but few foreign airlines
want to make them their base. Indian planes are usually serviced in Dubai,
Malaysia and Singapore, reflecting a history of penal taxes in India and high
customs duties on imported spare parts.
A
stroll round Dubai’s gold souk, a glittering warren of shops and discreet
offices, housing bullion worth $3 billion-4 billion, points to another
specialism—trading jewellery as well as precious stones and metals. A third of
demand is from India, reckons Chandu Siroya, one of the market’s big
participants. Indians go to Dubai to avoid taxes at home and because they trust
its certification and inspection regime.
Dubai’s
ports, air links and immigration rules also make it a better logistical base
than India. Dawood Ibrahim, a Mumbai mafia don, ruled from Dubai by “remote
control” before eloping to Pakistan in 1994. Since those wild days legitimate
Indian firms have thrived in Dubai. Dabur, which makes herbal soaps, oils and
creams, runs its international arm from there. Dodsal, which spans oil
exploration in Africa to Pizza Huts in Hyderabad, is based in the emirate. Its
boss, Rajen Kilachand, moved from Mumbai in 2003. “Dubai is a good place to
headquarter yourself,” he says, adding that a “Who’s Who” of Indian tycoons has
a presence. Dubai is gaining traction in finance, too. Rikin Patel, the chief
executive of Que Capital, an investment bank, says Indian firms are raising
debt in Dubai to avoid sky-high interest rates at home.
Treasure Island
About
5,000km (3,000 miles) south of Dubai lies Mauritius, an island so beautiful
that Mark Twain said God had modelled heaven on it. About half its people are
descended from labourers brought from India when Britain ruled both places. It
is the main conduit for foreign investment into India with 30-40% of the stock
of foreign capital sitting in funds domiciled in the island. A 1982 tax treaty
allows investors using Mauritius to pay tax at the island’s rate (which, in
practice, is zero), not the Indian rate. Foreigners also like the stability of
Mauritius’s rules and its army of book-keepers and administrators. Many
investors also use “P-Notes”—a kind of derivative with banks that gives them
exposure to Indian shares without having the hassle of directly owning them.
Sri
Lanka has testy relations with India, but Colombo is a vital port. About 30% of
containers bound for India go via intermediate hubs fed by small vessels,
either because big shipping lines do not want to deal with India’s customs
regime or because their ships are too big for the country’s ports. About half
of this trans-shipment business happens in Colombo. Its importance could
increase now that a big extension to the port there has just opened. The
project was funded by a Chinese firm probably too polite to admit that its
investment is partly based on the idea that India’s ports will never be
world-class.
A roll of the dice
Sri
Lanka also wants to develop a casino industry. Gambling is illegal in almost
all India, so people use offshore bookies or the internet. James Packer, an
Australian business dynast with a gambling empire in Macau, is said to be
considering creating a casino resort in Colombo aimed at attracting Indian high
rollers.
The
largest hub for Indian trade is probably Singapore. It is the centre for
investment banking, which thrives offshore, owing to the tight regulation of
India’s banks and debt markets. Reflecting this, the global exposure to India
of Citigroup and Standard Chartered, the two foreign banks busiest in India, is
1.9 times the size of their regulated Indian bank subsidiaries.
Fund managers running
money in India are often based in Singapore. India’s best financial newspaper, Mint, now has a Singapore edition. At least half of all
rupee trading is offshore, says Ajay Shah of the National Institute of Public
Finance and Policy in Delhi. Investors and firms do not like India’s fiddly
rules and worry that the country may tighten capital controls if its currency
falls too far, says one trader in Singapore. He denies, though, that the
rupee’s fall is mainly the work of speculators abroad. “The onshore guys have
as much of a role,” he says.
Indian
e-commerce firms often get their data crunched in Singapore, using web-hosting
and cloud-computing firms, such as Google and Amazon. Amitabh Misra, of
Snapdeal, says bandwidth costs less, technology is better and you avoid India’s
headaches—such as finding somewhere to work, coping with state-run telecoms
firms and having to wait to import hardware.
Singapore
is also a centre for legal services. International deals involving India often
contain clauses which state that disputes be arbitrated outside India, with its
clogged courts. Singapore, along with London and Paris, has become the
preferred jurisdiction. “The level of comfort Indian companies get from
Singapore is unmatched,” says Vivekananda N of the Singapore International
Arbitration Centre.
When
India’s economy thrived, in 2003-08, so did its offshore hubs. Singapore’s
service exports to India tripled. Yet these centres may sometimes be a reverse
barometer. If things improve in India, activity should shift to the mainland,
and vice versa. By gradually improving its ports, for example, India has
convinced more shipping lines to make direct stops.
The
government wants to attract activity back to create jobs and boost foreign
earnings. Pride plays a role, too—it is unbecoming for a potential superpower
to have outsourced vital economic functions. India has far less control over
Dubai and Singapore than China does over Hong Kong. Plenty of policy statements
in recent years argue that India should become a global hub for aviation, legal
arbitration, diamond trading and international finance.
In
the real world, however, the question is whether activity is leaving India as
its prospects have dimmed. A lead indicator is the purchase of gold by
Indians—a form of capital flight. Gold imports have hit $50 billion a year,
almost offsetting the boost the balance of payments gets from remittances from
Indians abroad.
Some
service industries do seem to be shifting from India. India’s balance of trade
in business and financial services has slipped into modest deficit from a
surplus five years ago. The number of big India-related corporate legal cases
at Singapore’s arbitration centre has doubled since 2009, to 49 last year. It
is setting up a Mumbai office to win more business. Trading of equity-index
derivatives has shifted—a fifth of open positions are now in Singapore and
DGCX, a Dubai exchange, is launching two rival products this year. A recent
deal by Etihad, the airline of Abu Dhabi, to buy a stake in Jet, an Indian
carrier, should see more long-haul traffic shift to the Gulf. (Jet’s boss,
Naresh Goyal, lives in London.) More rupee trading seems to be taking place
offshore.
The
biggest worry is that heavy industry is getting itchy feet. Coal India, a
state-owned mining monopoly sitting on some of the world’s biggest reserves,
plans to spend billions of dollars buying mines abroad—red tape and political
squabbles mean it is too difficult to expand production at home.
Some
fear manufacturing is drifting offshore. In the five years to March 2012, for
every dollar of direct foreign investment in Indian manufacturing, Indian firms
invested 65 cents in manufacturing abroad. Some big firms such as Reliance
Industries plan to invest heavily in India, but others such as Aditya Birla are
wary. Its boss, Kumar Mangalam Birla, has said that he prefers to invest
outside India—an echo of his father, who expanded in South-East Asia during
India’s bleak years in the 1970s.
The
Gulf has seen tentative signs of Indian manufacturers shifting base. Rohit
Walia, of Alpen Capital, an investment bank, says that in the past year he has
helped finance an $800m fertiliser plant and a $250m sugar plant. Both will be
built in the United Arab Emirates, by Indian firms that will then re-export
much of the output back home. The Gulf’s cheap power and easy planning regime
make this more feasible than setting up a plant in India. “It’s a new trend,”
says Mr Walia.
The
temptation for India is to invent new rules to keep economic activity from
moving abroad. In 2012 the government tried to override its treaty with
Mauritius, only to scare investors so much that it had to back down. To try to
plug its balance of payments, India is tightening rules on buying gold. The
country’s ministry of finance is said to be examining the shift of
currency-trading offshore. The government has intervened to insist that
shareholder disputes arising from the Etihad-Jet deal be settled under Indian
law—not English as originally proposed.
Yet
in the long run, coercing Indians and foreigners to do their business in India
would be self-defeating. Some may simply go on strike and it is far better that
activity takes place abroad than not at all. Any rise in the share of offshore
activity is best viewed as a warning system about what is most in need of
reform at home.
The
biggest warning sign would be if Indians themselves started to leave. Despite
some mutterings among the professional classes, that does not seem to be happening.
Still, if India does not kick-start its economy and reform, more than
derivative trading and Bollywood singalongs will shift abroad.
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