IFR India's path to sustainable growth 2016: Part 2
Marie Diron, Moody’s: The bankruptcy resolution framework will be a big step forward when it is effectively implemented, which is going to take some time in practice. A lot of professionals need to be recruited and the framework still requires a few details to be confirmed, but once it is all in place it should really encourage investment.
We have heard about the pick-up in FDI, but what strikes me is that domestic investment has been a lot weaker. We can guess what some of the hurdles to investment are: corporates with high levels of debt; difficult access to finance for some due to shallow capital markets; the regulatory environment; and uncertainty around bankruptcy resolution. So that law should help in the medium term.
There are a lot of measures on the table and our assessment is that the impact of these measures will materialise over the medium term. Some measures have direct effects: we’ve already seen FDI picking up strongly and subsidy reform has brought some relief to the government budget. But a lot of the measures, in particular the ones making it easier to do business, will take several years to materialise.
David Rasquinha, Export-Import Bank of India: There has been a sharp uptake in the numbers that quantify the ease of doing business but it is still a work in progress. Nothing can be accomplished overnight, given the structural rigidities in the economy and the historical dirigiste framework that has been the norm in India.
What matters is the intent and the direction the government is moving in; it clearly wants to see India improve its ranking – and not just by one or two places. To achieve more than that requires bold policy steps.
We are not going to see results overnight. It’s going to take a year, maybe a year and a half to start coming through. It is a testament to the vision of this government that it is willing to take these steps, knowing that the full benefits will only come later, maybe as much as three years down the line.
Avinash Persaud, Intelligence Capital: I think we’re being too kind to the government here. As far as the ease of doing business is concerned there is still a huge amount to be done. There is nothing stopping the country from becoming number one in the ‘Doing Business Survey’ in a very short space of time: a lot of incorporation, registration and licensing can be done online.
The reason we don’t is usually down to politics, because it threatens jobs, for example. This government has a tremendous amount of political capital and support to move in this direction. India should not be number 130 in the Doing Business Survey, it should be in the top 20. There is nothing physically stopping it and it needs to do a lot more, it needs to be more aggressive and more ambitious than they have been.
Marie Diron, Moody’s: There is some targeting of the indicators in the doing business question. It is true that some improvements can happen and the process can be streamlined quite quickly, which would be helpful without necessarily changing the overall business environment.
But politically challenging hurdles remain in terms of labour and land reforms. We have seen federal competition encouraged, and we will see what difference that makes – some states are certainly looking to take advantage of that.
It is not clear at this stage whether the competition is leading to emulation, and whether that will lead to significant changes. The land and labour questions look set to be the big hurdles to the ease of doing business in India.
Soumya Kanti Ghosh, State Bank of India: We should also remember that we moved up four notches last year to 130, and we have moved up nine notches in Starting a Green Business, and up 16 places in the Competitiveness Index.
The government has already taken a lot of the process online. Industry and licensing are now available online, renewal of industrial licensing can be done online, the records for export processing jobs have been moved online and tax can now be paid online.
The government has its MyGovernment.in portal that allows people to track what is happening, what ministers are doing. The Power Ministry, for example, has a portal showing how many villages have been electrified on an every-day basis.
One thing we do very badly in India in terms of ease of doing business is the contract. But hopefully the new insolvency framework will improve things significantly in that area. So as I said, these changes will start to make a difference to the numbers in the next one or two years.
Bejoy Das Gupta, IIF: This is the moment for India to seize the opportunity. Oil prices are below US$50 a barrel, which is unbelievably positive in terms of trade, and therefore the overall economy. We have stability, we have a government with a huge mandate to make changes, we have momentum and good capital flows. Global interest rates are as low as they can be. So why isn’t India doing better? There are three short-term issues, and then there are more structural and longer-term issues.
The first short-term issue is the bank NPL problem, which is a legacy problem that is taking longer to resolve than we all wanted. The second is the number of stalled projects, which should have been cleared faster, and are now dampening private investment. And the last is weak exports.
And then there is the fact that there is still too much bureaucracy in the economy, which is the longer-term, structural problem.
David Rasquinha, Export-Import Bank of India: NPLs are a problem but this is a global issue. It would be more of a worry if India was an outlier on the NPL front, but the numbers are no worse than you see elsewhere. We are not in the situation Greece is in. Italy has NPLs of 13%–16% of the banking system assets, and their provisions cover is around 50%–60%. That sounds very much like India.
We have a rather large neighbour with official NPL numbers of 1.8%, but I have heard estimates that its real numbers are 10 times higher than that. So this is not an India-specific problem, it is a global problem that is caused by overcapacity. Capacity utilisation in the Indian economy is currently around 68%-70%, and in some industries it’s gone as low as the high 50s. At 70% capacity utilisation it’s hard to generate cash to service interest and so you cannot repay your loans.
So the NPLs need to be seen in context. There is a huge overhang of capacity, globally and in India, and there isn’t enough demand to utilise that capacity. Either some of that capacity needs to be closed down, which is very difficult to do, or you wait until growth rises to the point where demand utilises that capacity. Until then things are not going to change.
So what can the government do about NPLs? There has been some debate in India about creating a ‘bad bank’, and there are those who are for this and those who are against it. Bad banks have been used all over the world, I don’t see why India should be different so I support this measure.
There is a certain amount of apprehension, especially in the public sector banking universe, that selling off loans with a significant haircut will lead to questions later about whether this was the right thing to do. Could the haircut have been smaller? To my mind, the solution is a bad bank owned by the government, perhaps with some stake in the banks. Then you are only transferring the haircut from one pocket into another. It is a closed loop so you capture whatever value might have leaked by retaining it in the system.
That should reduce the apprehension among the public sector banks, and reduce the weight of the NPL problem. Frankly, the management of the banks are devoting a lot of bandwidth to curing the NPL problem, which is diverting their attention away from growth. We need to approach this from both directions.
Soumya Kanti Ghosh, State Bank of India: One positive thing is that the process of corporate deleveraging has started. Take a steel company which is suffering because the steel price has crashed to Rs1,000 per tonne from Rs10,000 in three months. There is nothing anyone can do to make that business viable.
But in India it has generally taken a long time for these resolutions to happen. And banks – specifically the public sector banks – have kept these assets on their balance sheets until after the resolution has happened.
I think the bad bank is a good idea, but corporates are also in the process of deleveraging. This means credit growth will not pick up significantly, but at the same time the NPL problem seems to be coming to an end. The cycle looks like it has bottomed out. This will be good for the economy and good for the banks.
India went through this before, and it was much worse, in 1994 and in 1998. In 1998 the figure for gross non-performing assets (GNPA) was 16%, but it was brought down to 5% within around seven years. We have come through worse problems than this in the past and I have no doubt we’ll come through it again.
Marie Diron, Moody’s: Our concern is what will be done to prevent NPLs from re-occurring on banks’ balance sheets? That requires governance and structural reforms for the banks. We haven’t got to the stage of tackling that problem yet, which is why, from a sovereign risk perspective, the banking system continues to pose a contingent liability risk for India.
IFR: One of the benefits of the ‘bad bank’ solution has been that it can attract value investors, particularly foreign investors, such as hedge funds and private equity funds, looking for big returns. Could this happen in India? Could you see investors picking up distressed assets at a discount and then securitising them, for example, to create value for everyone in the chain?
Marie Diron, Moody’s: That could happen in India as it has in other places.
Bejoy Das Gupta, IIF: A lot of our members are active in India; a lot of the big private equity funds from the US or Singapore and elsewhere. They’re looking for deals, but the issues are pricing and the willingness of indebted corporates to restructure and do deals.
So you need a stick and a carrot. The bankruptcy court could be the stick, and then the prospect of an orderly resolution via private equity could be the carrot. Corporates need a greater willingness to take the hit on price.
IFR: Capacity utilisation rates have already been mentioned. Is this something of a chicken-and-egg situation in India? The narrative tends to focus on the funding perspective, and the question is why Indian corporates are not raising more capital for expansion. The answer is that the capex cycle hasn’t got to the point where corporates feel comfortable enough to do it yet.
When will the capex cycle turn in India? Are we getting any closer to the point at which Indian corporates feel ready to raise capital to invest in plant expansion or employment expansion? Or are they over-leveraged and right to be cautious?
David Rasquinha, Export-Import Bank of India: India has a spotty record here. In sectors like pharma capex is very much going ahead, but pharma is a bit of an outlier in the Indian economy. It’s not that it’s doom and gloom everywhere; it’s an industry-dependent phenomenon.
It’s very difficult to persuade a board of directors to engage in fresh capex if you’re not sweating your existing assets. Warren Buffett would say now is the best time to invest but you have to be very brave to follow that advice.
If the private sector cannot or will not invest – and it probably has good reason – then the public sector needs to take up the investment cycle. It can take a longer view and step in in its place.
That is happening in India, in areas like roads. The Surface Transport Minister has done a tremendous job in trying to get the road sector off the ground, eliminating some of the bottlenecks. Railways have also seen significant developments; they are not making many headlines but things are happening on the ground. Also in the power sector.
So the public sector is moving. The government and the public sector do not move fast, but they are a juggernaut once they get going.
Soumya Kanti Ghosh, State Bank of India: Private investment has been slow to pick up, but that needs to be put into perspective. There is a process in India where tenders are announced and then awarded. In the last year the total amount of tenders awarded was around US$45bn. Of that, 60%–70% was in sectors like power, roads, railways, irrigation and mining.
The government has laid out an ambitious plan to invest around US$350bn in infrastructure over the next three to four years. Some sectors are already doing well, for example the power sector. The government has taken a lot of initiatives, like the UDAY scheme [for the financial turnaround of power distribution companies].
Today, out of the 590,000-odd rural villages in India, the government has electrified close to 98%. That’s no mean achievement. It is also separating the rural feeder from the urban areas, to ensure there is constant supply of electricity in the rural areas. The current government also stated it would convert around 90,000km of roads into international highways. So far it has converted around 70,000km, so that’s another big achievement. And it is planning to invest around US$130bn into railways over the next three to four years.
There is a lot of potential in the infrastructure sector. Private sector investment may not be happening right now, but the government is giving a big push. Remember, when the current government was last in power, between 1990 and 2004, it pushed its ‘Golden Quadrilateral’ strategy. This time its focus is on the railways. So I think you will see those efforts gain traction in the next year or two, as these investments fall in place.