Adani's $70 Billion Disaster Is Badly Timed For India's Economy

Gautam Adani speaks at the World Congress of Accountants in Mumbai on November 19, 2022.

On any list of winners from the ginormous losses ruining Gautam Adani’s year, Elon Musk deserves a spot. Adani’s $70 billion loss these last few days knocked the Tesla founder’s market-value disaster from the headlines.

The selloff started last week with allegations of fraud by short seller Hindenburg Research. It accelerated when Adani thought it wise to issue a 413-page rebuttal that conveyed a thou-dost-protest-too-much vibe. If you can’t address concerns about your conglomerate’s corporate governance in a few pages, it’s time for a new investor-relations team.

We’ll leave it to the folks at Hindenburg to defend their allegations (which Adani has firmly denied). Musk, too, whose distraction since buying Twitter has investors fleeing Tesla (and costing him way more than Adani). Far more interesting is how the troubles facing India’s richest man are complicating Prime Minister Narendra Modi's economic narrative, too.

“To a significant extent, the damage has been done,” says analyst Udith Sikand at Gavekal Research. “Whether Hindenburg’s specific allegations are shown to have merit or not, the report’s publication throws a spotlight on corporate India’s governance that is likely to cause at least some investors to reassess their expectations of returns from the world’s fastest-growing major economy.”

It's worth noting, too, that “the accusations of fraud at one of India’s biggest companies come at an especially inconvenient moment” for Modinomics.

They come at a time when India isn’t just growing faster than China, but producing more tech “unicorn” startups than Xi Jinping’s economy. They are overshadowing the release of Modi’s annual budget on Wednesday, the Bharatiya Janata Party’s big chance to shrink a record budget deficit, get structural reforms back on track and reassure credit rating companies.

The allegations come, too, a bit over a year ahead of national elections. This week, Modi’s party had hoped to turbocharge its argument to stay on after nearly a decade in power.

“Now,” Sikand says, “the allegations of scandal at the Adani Group will come as a gift to Modi’s political opponents, given the longstanding perception that Adani’s rapid rise to the top of India’s billionaires’ list is largely attributable to his close relationship with the prime minister, who like Adani hails from the western state of Gujarat.”

The political establishment being reminded of the place Modi ran from 2001 to 2014 is rather ill-timed for another reason.

India's Prime Minister Narendra Modi waves to his supporters during a roadshow ahead of the BJP national executive meeting in New Delhi on January 16, 2023.

Modi rose to folk-hero status thanks to Gujarat’s lively economy. Year after year, Modi produced faster gross domestic product, greater productivity and innovation, less bureaucracy, better infrastructure and corruption dynamics that seemed less endemic than national averages. In 2014, voters returned the BJP to power in hopes Modi would apply the “Gujarat model” throughout the second-most-populous nation.

In his first term, Modi opened a number of key sectors to increased overseas investment, including aviation and defense. He presided over the implementation of a national goods-and-services tax. Modi's team projected a sense of confidence that dovetailed with the startup boom putting India in international headlines for all the right reasons.

But few would say Modi transformed India Inc. in the epochal ways global investors hoped. One metric Modi boosters can’t easily explain away: how India’s 85th place ranking on Transparency International’s corruption perceptions index still puts it 20 rungs behind 65th-ranked China.

India’s score in press freedom surveys is plunging precipitously. This is not a state of affairs that cheers global investors angling for less opacity, leveler playing fields and faster progress in reducing poverty.

Debt, meantime, remains a chronic demerit. Modi still must prove he can narrow a deficit that hit 9.2% of GDP during the first year of the pandemic—and to maintain that progress.

True, Modi’s government hopes to narrow the gap to about 6.4% this year. But that’s easier said than done amid recession fears in the U.S., Europe and Japan and an uncertain trajectory for China. The same goes for making reform upgrades that score India a credit rating higher than one rung above junk.

There’s at least one way Adani’s troubles are a microcosm of India’s: a misplaced belief you can simply grow your way out of debt. Japan’s made it amply clear that growth alone isn’t enough these last 30 years. China, too, is seconding the difficulty of the strategy.

In the financial year ended March 31, 2022, Adani Group's total gross debt rose 40% to 2.2 trillion rupees (nearly $27 billion).

In its rebuttal to Hindenburg, Adani has sought to frame the allegations as an assault on India itself. This suggests Adani is more focused on the symptoms of the conglomerate’s woes—and emotions—than the underlying cracks.

The fact Adani’s stumble is now tripping up the broader stock market suggests this a moment for India Inc. to redouble efforts from reassuring global investors. Modi’s government, too.