May 06, 2013 at 11:55pm IST

Why a resurgent american economy matters for India Inc

Fall in Canada is splendid. Around September to early October, for a couple of weeks every year, the changing leaf colours attract thousands of visitors. Two years ago, Dow India chairman Vipul Shah and his wife decided to take a trip to see the sight. There is this one train that goes to this place in Ontario, where the colours are at their best. It leaves early in the morning and returns from the small town of Sault Ste Marie.

The Shah couple was staying at a hotel across from the station to catch the early train. "We went down for dinner in the restaurant at the hotel. Both of us follow a totally vegetarian diet. So we asked the waiter what they could offer us," says Shah. "Give me a minute," said the waiter.

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In a couple of minutes, the French-Canadian chef came out and listed the options: Vegetable curry, naan and basmati rice, with papad and mango pickle! The Shahs were stunned. Just as they were recovering, he dealt the coup de grace. "Or would you prefer a Jain meal?" he asked.

Why a resurgent american economy matters for India Inc

The steel mill at Ste Marie is now the second largest steel producer in Canada. It also serves arguably the best Jain meals upwards of the snow line.

The chef revealed the secret a few minutes later. Sault Ste Marie, in Algoma district, had only one large employer: Algoma Steel. When the company went bankrupt, the town was in real crisis. That was when Essar Steel rode in from the East.

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They took over the mill and invested to revive the mill as well as the town. While this was going on, Essar executives from India stayed in this hotel with their spouses. After a few days of eating nothing but vegetarian pasta, they approached the chef. "They asked me if their wives could use the kitchen to cook a vegetarian meal. I said, sure, but you will have to teach me as well. Now, we have Indian dishes on special request," says the chef.

The steel mill at Ste Marie is now the second largest steel producer in Canada. It also serves arguably the best Jain meals upwards of the snow line.

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The Essar deal was sealed in 2007, but in the last one year, more and more Indian firms have been heading to North America to use it as a base for business. Consider this: Indian direct investment in the US, according to the US Bureau of Economic Analysis, has gone up from $2.55 billion in 2009 to $4.88 billion in 2011. From 2005 to 2007, it was flat at $1.6 billion. Over the last one year, the S&P 500 index has delivered more returns than all other major indices, including Nifty50, Hang Seng and FTSE100.

It is no secret that the Indian corporate sector has had four frustrating years since 2009. Investments running into billions of dollars are stuck for lack of government clearances and fuel shortages.

Entrepreneurs across the board are reeling under high debt and most have lost their appetite for any more investments. The income tax department has been busy sending tax demand notices to multinational firms of all hues to pay up backdated taxes. Responding to the changed scenario, many Indian firms are figuring out how to use the US more strategically.

Essar, Reliance Industries Limited and Aditya Birla Group lead India Inc in terms of investments in Canada and the US. But they are not the only ones. Smaller companies like Welspun Textiles, Jain Irrigation, Virgo Engineers, Motherson Sumi, Varroc, Uniparts and dozens of others are all leveraging Uncle Sam's intellectual and financial capital. The new driver is plummeting energy costs. Not surprising that the Indian consulate in the US is urging Indian companies to invest in the American gas chain. India pays close to $16 to import one unit of natural gas while gas prices in the United States are close to $4.

The 9/11 attacks symbolised a global hegemon that was well past its heydays. When the US initiated the wars in Iraq and Afghanistan, it came as a further confirmation of the fact. By 2009, with its financial institutions under siege because of the housing price collapse and the beginning of a credit squeeze, it looked like the world's largest economy was ready to give way to giants from Asia and other emerging markets.

Now it looks like the naysayers were wrong; and how!

A recent McKinsey Global Institute study shows that the United States is the only major developed economy that is following Sweden and Finland that were able to negotiate similar debt-induced recessions in the 1990s. Debt to GDP in the US has fallen 16 percent in the last five years. In contrast, the ratio is rising sharply in Germany, United Kingdom, France, Italy and Spain. As with Sweden during the '90s, the fall in US debt is entirely because of cuts made by the private sector, particularly the financial industry and households.

Over the last two years, real estate prices have stabilised and the savings rate has improved, energy costs are down and the cost of finance remains one of the lowest in the world. All this while Europe has slipped and emerging markets such as India and Brazil have stalled. China was one exception in the past. Its advantage of cheap manpower, a fixed currency, land and infrastructure were everything the US did not have. The advantages have weakened somewhat. Jagdish Sheth, Charles H Kellstadt Chair of Marketing in the Goizueta Business School at Emory University says, "Most multinationals are seeing the US turnaround as a great way to de-risk their dependence on their own countries and regions."

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