India’s offshore economy
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India’s offshore economy
Made outside India
As growth slows and reforms falter, economic activity is shifting out of India
Aug 10th 2013 | COLOMBO, DUBAI AND MUMBAI |
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.
A presence abroad but still engaged with India
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.
Indians splurge their rupees abroad
The idea that some things are better done abroad is hardly new. Hongk 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. [Not correct: Raj Kapoor started it in 1964 with Sangam. Around the World and An Evening in Paris, also 1960s films, had long Swiss sequences. Several dozen films were shot in Europe and elsewhere outside India before 1985.] The Alps were easier, cheaper and safer than the more familiar location of Kashmir.[Wrong on both counts. Kashmir was a favored shooting destination till 1990. Indian audiences liked the novelty of new locales: as Americans and the British did in the 1960s, and still do,]
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.
Indian companies run from abroad
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.
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.
Is activity leaving India?
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.