IFR India's path to sustainable growth 2016: Part 3
Marie Diron, Moody’s: We’re also seeing a shift in the composition of expenditure, from public expenditure towards capex. That will be positive if it is a catalyst for private sector investment, because while the numbers are impressive, Indian numbers generally are because the economy is so large. But in relation to the size of the economy it is not so impressive.
Given the constraints on the budget, the government cannot trigger this investment revival on its own. It can only be the catalyst. Public capex can unblock those infrastructure bottlenecks, which can have a large multiplier effect.
Avinash Persaud, Intelligence Capital: Emerging market economies have constraints. Can India really grow at 15% per year? I’m not sure. There are factors that provide that opportunity, but there are others that will create problems. India is growing at 7% and maybe it could be 10% with this infrastructure investment, but we’ve got to be realistic about what can be achieved.
A lot of this is about design. It is not easy for the private sector to get involved in large, long-term projects so we’ve got to make sure the system is well designed, including the tenders, the guarantees and the regulation, so it all supports long-term investment.
Around the world today there is a shortage of long-term investment, largely because the regulation of life insurance and pension funds makes it very costly for them to make these kinds of investments. We have to make sure that, while India is modernising and adopting international regulations, it only takes the good things, and not the bad things. We’ve got to mobilise domestic savings, which India does have, for long-term investing, which some international regulation actually prevents.
Bejoy Das Gupta, IIF: One of the most exciting parts of the Indian economy today is the digital economy, which promotes financial inclusion. The government is pushing public infrastructure for the digital economy, such as the inter-operability of the unified payment system, the Aadhar card and the e-economy.
Of course, there’s a big push on the banks to promote financial inclusion, but what I see happening here is technology, the government and the private sector coming together to form partnerships.
It’s not easy by any means, but it’s really shaking up the system. Financial services are like water in the economy: too little of it and we have a drought; too much of it and you have a flood. But right now we have half the economy with no access to any form of savings products, credit products or insurance products. Bringing those people into the financial systems is a game changer, which is another building block for Indian growth.
IFR: It’s also worth pointing out that the government has taken steps to liberalise the domestic capital markets, making it easier to raise offshore rupee finance. There have been things like the Depositary Receipt (DR) reforms, which came out of the Sahoo Committee report. That hasn’t come to fruition yet – I think there are some taxation issues that need to be resolved – but certainly the framework is there.
But it does seem there is a general recognition that the capital markets can play an important role in funding India’s growth, including in infrastructure. There are products like InvITs in the pipeline which will be listed offshore but will effectively put power assets into the structure.
Does the panel think the government has done enough to push the development of the capital markets domestically in India? Given that markets are quite shallow, and Indian institutional investors are quite risk averse, what can be done to ensure all Indian corporates have access to financing, even if they do not have a high investment-grade rating? Has the government done enough, will its efforts bear fruit and will we see a deepening of India’s capital markets?
Avinash Persaud, Intelligence Capital: Without getting into semantics, perhaps what we need is more broadening than deepening. Sometimes we have a tendency to whip the banks to do more risky lending, and then we whip the banks for having done risky lending. So what we need is other types of institutions to take on more of this risk. Maybe this will be financed in the capital markets, but we need to look at our institutions. Do we have non-bank financial institutions that can be involved in risky lending?
Banks are very much collateralised lenders. They are part of the payment system and can’t take too much risk. So the question is whether India has the breadth of institutions that can be involved in that kind of lending.
Take the digital economy, where there have been some interesting developments such as crowdfunding. We have to be very careful about how this is regulated. If people think crowd financing is merely banking we’re going to have some consumer protection problems further down the road. But there’s an opportunity here to mobilise domestic savings for more risk-taking activity. People can make higher returns for taking greater risk, as long as they’re aware of the risks they’re taking.
Marie Diron, Moody’s: Our assessment of the RBI measures so far is that they will help enhance liquidity in the corporate bond market. But they will largely benefit the most highly rated corporates and banks. So far the measures are unlikely to reach the lower-rated institutions, but maybe some other form of financial services can reach them.
The corporate bond market is still 90% private placements, so liquidity is very low. These measures attempt to address that issue.
Bejoy Das Gupta, IIF: The equity markets are fine, there is no issue there. The issue is with the corporate bond market, which is very shallow and typically bank-centric. More measures to improve that would help, and to be fair the government is trying. But ultimately SMEs and smaller corporates need more innovative sources of financing, and crowd financing could be one. Regulatory support to allow those innovations to happen would be most welcome.
Soumya Kanti Ghosh, State Bank of India: Around 18% of Indian GDP comes from the corporate bond market. That is lower than some of India’s South Asian peers, but higher than you see in some other markets. The government and the central bank have taken steps to address this and that is positive but it will take time for the corporate bond market to develop.
As for project investment, there are three parts to this: external commercial borrowing, equity and bank lending. The equity market and bank lending have both picked up, but there has been a decline in external commercial borrowing. In time, this should also pick up but in a country where bank credit is around 50% of GDP, it will not be easy for this market to gain pace.
IFR: What are the key takeaways people should take from this discussion?
Marie Diron, Moody’s: There have been a lot of initiatives and measures taken in many areas by the government, which shows India is still very much at the formulation stage. The implementation, and the consequences of those initiatives, are ahead of us. I’ve heard a lot about medium-term perspectives, which is not unusual for India, where things do tend to progress slowly. That is in line with our perspective on India, which is why we have a positive outlook on its rating.
Soumya Kanti Ghosh, State Bank of India: India has made significant steps forward. It has taken the decision not to attempt big bank reforms, but instead to go for small steps. We released a book called ‘1,000 Small Steps’, about the many small, incremental steps the government is taking to move India in the right direction.
There have been a lot of major reforms in the last three to six months. The GST should add 1% to India’s GDP and increase the tax take by more than 2%, and most importantly, reduce the size of the informal economy. The bankruptcy law is also a significant development. The next two to three years will be crucial for this government.
When the current government came to power, a lot of people overestimated what it could do in its first years in power. Now a lot of people are under-estimating what it can do in the next 10 years. We should concentrate on that underestimation, not dwell on any disappointments from the first two years. A lot of things have been achieved and we will see them bear fruit in coming years
Avinash Persaud, Intelligence Capital: I think India will grow by about 10% for the next 10 years. That presents huge opportunities – and some risks. But the government is focusing on efficiency and governance, on delivering more predictability in policy, and that is the right strategy.
Bejoy Das Gupta, IIF: The government is laying the foundation to achieve that 10% growth target over the medium term. Over the near term, the focus needs to be implementation, implementation, implementation. Hopefully it can also speed up the resolution of the stalled legacy projects problem.
David Rasquinha, Export-Import Bank of India: Perhaps it is a legacy from our mixed economy days, but we are good producers, but not good marketers. India has a compelling story today. It’s not smelling of roses everywhere, there are areas that need a lot of improvement, but it is a highly compelling story.
We need to make more effort to get the story out, because not enough is being done to market India to the world. So I salute State Bank of India for sponsoring this round table, as an effort to showcase India to the world. We need to do more of this.
IFR: Ladies and Gentlemen: thank you for your comments.