It is impossible to escape globalisation

It is impossible to escape globalisation

Can we ever be free from global waves? Even today at the macro level the smell of a recession in the West has already caused considerable turbulence in economic forecasts, and this is where India stands out by being decoupled. But at the micro level, globalisation still stands strong as is seen in India recently

Madan SabnavisUpdated: Friday, February 17, 2023, 10:02 PM IST
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The trend these days is for countries to become more inward looking. Besides politics which appeals to the electorate, Covid has justified such jingoism. But can we ever be free from global waves? Even today at the macro level the smell of a recession in the West has already caused considerable turbulence in economic forecasts, and this is where India stands out by being decoupled. But at the micro level, globalisation still stands strong as is seen in India recently.

The controversy relating to a large Indian conglomerate bears testimony to this theory. The case is simple. A short seller in the USA had a report on the conglomerate where certain failings were alleged and this came out at a time when the Indian group was going in for an FPO. A micro issue should ideally not have become a macro one. But it did, at least temporarily.

The impact on the landscape has however been far-reaching, as several questions have been raised as a consequence of this episode. The RBI has acted with alacrity and done a quick reality check with banks. The press release put out that the banking system remains as strong as ever is timely and keeps out speculation. The exposures of the system to the group are low and well within the limits prescribed by the regulator even in case the worst-case scenario plays out. This is assuring.

SEBI would also be looking into the allegations made as they are in the realm of market practices. The issue is complex as the Mauritius route has always been known for opacity and would require time to get things clarified.

Let us see now as to how the process of globalisation has led to seepage through the domestic system, raising several doubts. First, to begin with the news of the report had an impact on the prospects of the IPO which remained unsubscribed by the retail investors and it was a last minute entry of certain players that saved the issuance. This was probably expected.

Second, along with this news, the share prices of the group companies went down, which has been magnified as being the loss to shareholders. This should be read with caution because there is a difference between notional and actual loss. The notional loss, as the word indicates, is only theoretical. The actual loss is only when a sale is reckoned. Typically investors don’t sell when there is bad news; but the erosion in market cap was sensational. The market is now back to normal after a fortnight treating this episode more as ‘noise’ which can be ignored now.

Third, as long as the controversy lasts, foreign investors will think twice about these stocks, which is not good news. This is the collateral effect. Add to this the fact that some of the global indices have lowered the weight of these stocks, means that there is a second round of loss of interest in this Group’s shares. This is more a micro issue but is unsettling as we talk of Indian bonds being included in global bond indices.

Fourth, it is still not very clear whether foreign investors will lower exposures to India and choose other markets as ours is still enticing. A clarification on the governance issue will help here. FPIs have been negative in equities so far this month though it is hard to conjecture if the two can be linked. This is why a voice from the regulator would help to assuage sentiment here.

Fifth, while the RBI has put out the green flag, lending institutions will review their options on further lending. Overall leverage of this group and other such conglomerates will be looked at more closely by the banking system. This will be more of a hygiene issue at the micro level as there is more scrutiny on other group lending too. Also, this incident will strengthen the case for not giving banking licenses to corporate houses.

Sixth, as most of these exposures of the system to the Group are in the infrastructure space, a question raised is whether there will be any pushback here in terms of private investment. This particular group has been a frontrunner in ports, airports, power, and storage among others and has in a way been instrumental for substantial building of infra in the country. For the last few years the government has been doing the heavy lifting on infrastructure hoping to crowd in private investment. The broader issue here is whether these contracts will be reviewed by the concerned parties. As of now it looks like that there aren’t concerns, but one can never tell.

Seventh, it is likely that there would be a deep dive investigation of several companies, especially those which have investors coming in from tax havens. This is a fallout of this episode for sure as there has been considerable opacity on this score.

Globalisation is hence still strong today with a single external report causing considerable disruption in the Indian markets (even if the political noise is ignored). There will definitely be learnings from this episode. A lot of cleaning up, which means revisiting both the banking as well as securities market, is likely to follow to ensure that there is more transparency in the system. But on the whole after the initial hiccups, business will continue as usual given the strength of the economy and the policy framework that is in place.

Madan Sabnavis is Chief Economist, Bank of Baroda, and author of ‘Lockdown or economic destruction?’ Views are personal

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