BofA Sees Rupee Drop Creating China Alternative: Corporate India

Bank of America Corp., India’s top-ranked takeover adviser, says the rupee’s depreciation is generating interest from U.S. companies for setting up factories in Asia’s third-largest economy.

Rupee trading at between 60 to 62 per dollar will lure overseas firms to invest in India, Kaku Nakhate, president and Bank of America India country head, said in an interview. The rupee has fallen 16 percent in the past 12 months making it the worst performing major Asian currency after the yen and rupiah.

“U.S. companies are looking for an alternative base in Asia outside China and India fits the bill,” said Nakhate. “We are getting many inquiries from them. They want stability of rules in areas including land acquisition and taxes.”

The rupee’s drop is making India a more attractive destination amid rising wages in China and labor strife in Bangladesh. To benefit from the currency advantage, India will have to ease rules and reduce bureaucratic delays, said Vikas Halan, a senior analyst with Moody’s Investors Service. Companies in India face more red tape than in Zimbabwe and Haiti, according to the World Economic Forum.

“I remain skeptical of the situation in India,” said Singapore-based Halan at Moody’s, which rates India at Baa3, the lowest investment grade. “Most manufacturers in India are not doing well compared with China because of structural issues” such as labor laws, he said.

Photographer: Brent Lewin/Bloomberg

A laborer works as water is used to cool melted steel at the Kamani Tubes Ltd. plant in Wada, Maharashtra, India. Close

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Photographer: Brent Lewin/Bloomberg

A laborer works as water is used to cool melted steel at the Kamani Tubes Ltd. plant in Wada, Maharashtra, India.

China, the world’s second-largest economy, is targeting a 7.5 percent growth this year. India’s central bank forecasts the $1.8 trillion economy will expand 5.5 percent, while Goldman Sachs Group Inc. predicts a 4 percent growth.

Competitiveness Ranking

India ranks 104 in the World Economic Forum’s Global Competitiveness Index for burdensome bureaucracy, while China is ranked 14. India’s overall position in the competitiveness index fell to 60 in the 2013 report. The nation has lost 15 places since 2006.

Delays in getting mining rights prompted ArcelorMittal (MT), the world’s biggest steelmaker, and Posco to scrap 720 billion rupees ($11.7 billion) of projects in Odisha and Karnataka states respectively.

India is also seeking about $2.2 billion in taxes from Vodafone Group Plc (VOD) following its purchase of Hutchison Whampoa Ltd. (13)’s business in the nation. The Supreme Court ruled in January 2012 that the operator isn’t liable and dismissed the government’s case. Former Finance Minister Pranab Mukherjee amended the tax law in March 2012 to revive the claim.

‘Lot of Harm’

The Vodafone tax case “did a lot of harm” to India’s reputation as an investor friendly destination, Sanofi (SAN) Chief Executive Officer Chris Viehbacher said on Sept. 30 in Mumbai. The French drugmaker has disputed a claim by tax authorities to pay dues following the acquisition of India’s Shantha Biotechnics Ltd..

The rupee strengthened the most in two weeks to 61.74 per dollar yesterday as U.S. lawmakers’ failure to resolve a budget impasse damped demand for the dollar. It rose 0.5 percent to 61.44 a dollar.

Prime Minister Manmohan Singh has eased rules to allow foreign carriers buy stake in local airlines and overseas retailers own 51 percent of local companies to lure inflows and boost the rupee, which plunged to a record 68.8450 per dollar on Aug. 28. It has recovered 10 percent since then.

The currency’s current level will help India become an “automobile manufacturing hub,” Nakhate said.

Carmakers including Maruti Suzuki India Ltd. (MSIL) plan to cut use of imported parts by 3 percentage points this year, Chief Financial Officer Ajay Seth said on a July 25 conference call with analysts. The company imported 19.5 percent of its raw material as of March 31, he said.

China Costs

“International companies that have set up manufacturing facilities in India will have to use more local products as rupee weakens,” Nakhate, 47, said. That will “build capability, there will be more exports, which will help to cut the current account deficit.”

Higher costs in China are leading some labor-intensive manufacturers to look for alternatives, creating “a huge opportunity for India,” S. Gopalakrishnan, president of the Confederation of Indian Industry, said on Aug. 30.

Average inflation-adjusted wages have more than tripled in a decade and non-wage costs for procedures such as hiring and firing have risen since the introduction of a 2008 labor law, the Asian Development Bank said in a report published in April.

The recent stability in the Indian currency is also prompting international funds, which had exited the Indian market five years ago, to return, Nakhate said, echoing similar views by Prashant Jain, chief investment officer at India’s biggest money manager, HDFC Asset Management Co.

‘Bombed Out’

India may have seen the worst of capital outflows as the rupee stabilizes and rising exports aid corporate earnings, Jain said in an interview broadcast on Bloomberg TV India on Sept. 30.

Foreign funds bought a net $2.1 billion of local equities in September, the first monthly net inflow since May, after the central bank Governor Raghuram Rajan outlined plans to bolster the rupee when he took charge Sept. 4 and the Federal Reserve decided to maintain economic stimulus.

“Large funds are saying it is a bombed down market and the worst is over,” said Nakhate “They are willing to come in with a two- to three-year perspective as they believe this cannot last for ever.”

To contact the reporters on this story: George Smith Alexander in Mumbai at galexander11@bloomberg.net; Anto Antony in Mumbai at aantony1@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net

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