Adani Crash & impact on Economy (SPECIALS)

The Adani Group, one of India's largest conglomerates, recently lost tens of billions of dollars in market value. An American investing group called Hindenburg Research accused the company of fraud in a report last month.

This brief aims to attempt toexplain what happened and what the fallout could be for India's economy.

Brief Background

• In January this year, a scathing report on the Adani Group by US short seller Hindenburg Research was released.
• The report accused billionaire Gautam Adani of operating “the largest con in corporate history”.
• Allegations:Hindenburg made allegations of several financial irregularities across the group.It claimed
  • Adani had carried out stock manipulation
  • made improper use of offshore tax havens
  • raised concerns about the group’s high level of debt
  • alleged violations of environmental laws
  • Adani Group had taken excess benefits from the government and private companies.
  • questionable activities of the group, such as the purchase of land outside its purview, widespread profiteering and contractual manipulation
• Adani’s stand:Mr Adani denies any wrongdoing but investors have been rattled, with losses in Adani Group’s listed companies reaching $108 billion, or halving in market value.
  • While denying, he termed the allegation as an “attack on India”—these developments carry significant geopolitical implications for South Asia.

Issues raised by the Case

• Accountability:The Adani predicament raised questions about the regulatory effectiveness and accountability of Indian institution
• Corporate governance issues:It has raised questions on the various aspects of the business, such as high debt and corporate governance issues.
• Impact on foreign investors:It has somehow also tarnished the image of India at a global level. Market participants, especially foreign investors, have started to sound sceptical about India’s story and started asking more questions about accounting policies and various other things.
• Crony capitalism

How significant is Adani Group for the economy?

Adani Group is deeply entrenched in sectors that are fundamental to India’s economy.

• Energy and Infrastructure: He won a slew of government contracts in energy and infrastructure. His companies mine coal, produce power, and transmit it. They run ports and airports. They’re setting up giant solar farms.

• India is the world's second-largest consumer and producer of coal, and Adani Enterprises has emerged as one of the largest developers of coal mines in the country.
• India’s LIC is heavily invested in Adani’s companies. The 66-year-old Life Insurance Corporation (LIC), which is majority-owned by the government, and manages more than $500 billion (41 lakh crore rupees) in assets. Over 50 million customers pay premiums for LIC’s insurance products. In Indian public life, few brands are more trusted than LIC.
• Exposure of India’s state banks:The exposure of the overall banking system to the Adani Group — domestic and international — was $23 billion to $24 billion as of March 2022. Indian banks have about a one-third share of this, with most of that coming under the public sector banking system.
  • However, this crisis, in the present context does not possess a systemic risk to the banking sector, as most of the domestic loans are secured through stable cash flows.

Impact on Economy

• India’s recent economic growth has rested on a model that champions nationalist industrialists like Adani.
• This shock will rock not just the equities markets but India’s economy overall, given how deeply and widely the firms are embedded in the country’s infrastructure.
• There will be more volatility in India this year; hence the market is prone to a correction.
• The taxpayer will be hit, additionally, by her indirect exposure to the group, through LIC and the state-owned banks.
• A bailout would limit the damage that too would be funded by the public exchequer.

Geopolitical implications for South Asia

• China has dotted South Asia with infrastructure projects through its Belt and Road Initiative(BRI).
  • Large investments through the BRI are possible due to the nature of the Chinese political economy, which can marshal state capital to foreign shores without needing private sector buy-in.
• As a regional competitor, India has responded to Chinese foreign investments with its own foreign investments, albeit differently from China’s model.
• India cannotmatch the BRI dollar-for-dollar or in scale. As a result, India has increasingly turned to its private sector for assistance.
• Several companies, such as the Adani Group—a multinational corporation dealing in energy and transport—have seemingly answered the government’s call.
  • Their investments in South Asia have led someto label the CEO, Gautam Adani, as India’s solution to Chinese influence in the region.
• The Modi government’s strategy against China “needs an Adani” to succeed.
• Required intervention:To help counter Chinese influence in South Asia, India must facilitate foreign direct investment by private sector firms while disabusing false claims that companies act as tools of India’s foreign policy establishment.
  • Providing increased incentives for partnership-based projects with local companies in host countries might be one way to achieve this balance.

The crisis engulfing India's Adani Group highlights the need for India to further expand its sources of  investment and production beyond a heavy dependence on a few private conglomerates.