How long will it take for India to get its investment-growth back, and what does the government need to do to ensure this happens? Along with this, a panel of experts at the FE Best Banks Awards function discussed whether there was a shortage of either debt or equity that would hold back investment. Excerpts:
Sunil Jain: Are the reforms the FM has announced since the Budget enough to stimulate investment-growth, is it enough to get investments leaving China to come into India? If they aren't, what are the three things you want the government to do?
Rajiv Lall: The main task for the government is to provide stability and certainty. People want an assurance that there will be no significant changes or backtracking in the general direction of policy. Second, is a commitment to improving the ecosystem for nurturing business-for instance, predictability and accountability of regulatory agencies, fairness and timeliness of execution in tax collection and administration. And, third, is support from the government to rationalise public sector banks. We are at the cusp of transformational change for the financial system, one in which the banking system will be very different from the last 40 or 50 years.
Rashesh Shah: The most important thing is to find a way to convert the savings that we have-almost 30% of our GDP, or around $900 billion-into investments, especially long-term investments. A lot of the problems we're seeing right now-in infrastructure or housing-emanate from the inability to match short-term and long-term savings/investments; so, once we fix this, a lot of problems will go away.
The other thing the government can do is to revive optimism since liquidity required has already improved over the years; the recent tax cuts and other reforms have resulted in optimism starting to come back. I think businesses need to do their bit.
Third, I think the government needs to find the balance between the role of the public and the private sector. A lot of assets are with the public sector, but it is the private sector that has the ability to convert those assets into efficient cash flows, and create greater value. This asset monetisation, where the public sector can take the risk to create the asset, and then transfer it to the private sector on a long-term basis, is important.
Sanjiv Bajaj: The government, very clearly, has gone after crony capitalism, and corrupt decision makers, as it should. But, there is an equal need to separate genuine mistakes and genuine risk-taking, because otherwise, we are never going to be able to really move faster. Second, we have seen some very good discussions with the FM and her team over the last 6-8 weeks, and these have resulted in some very quick measures; this mustn't be a one-off.
Jain: Ajit, you're a lot less optimistic than Rashesh and Sanjiv...
Ajit Gulabchand: I share the optimism, but not the time span in which it is likely to happen! I'll stick to infrastructure since that is something I understand. The Rs 100 lakh crore investment the government is talking of is, in the context of the Indian economy, not that big. But, nonetheless, it will be very difficult to achieve. The funds required will be much larger than what the banking system can deliver right now; so the government will have to create confidence in banks in order to provide that kind of funding. Besides this, the government also has to look at bringing in private players. This will call for a big leap of faith for the investor as well as those in the banking system; but if, as now, the government agencies involved-like NHAI or the State Electricity Boards-don't pay their dues on time, the system isn't going to work; this is something the FM is trying to fix.
The next is lowering of taxes, to leave more in the hands of the people, so our savings rate goes back to 36% of GDP; only then will we get the kind of investment needed for a $5 trillion economy. Also, the regulatory environment has become excessive and very unstable; this compliance requirement frightens industry and, therefore, investment.
Seshagiri Rao: In the short-term, we need more government expenditure and increased liquidity. Also, we need to be cautious about the FTAs we sign; in the past, Indian industry has always suffered. We need to be cautious in signing RCEP, to ensure industry is not harmed by way of dumping, particularly from China.
Jain: Should banks be funding long-term debt given their borrowings are essentially short-term? Bond markets are an obvious solution, but we've been hearing about them for decades... If we're going to become a $5-trn economy, or double that, who is going to fund the debt?
Lall: There are issues of asset-liability mismatch, and the understanding of project finance could certainly be better, but I don't think that is an insurmountable problem. If you reflect on the 10 years of the infrastructure boom and bust, the problems that we faced were not a result of asset liability mismatches in the banking system. The issue is not bank versus bond markets; the real issue is about what should be the responsibility of the private sector versus what should be the responsibility of public.
Jain: Most infrastructure financing was done by PSU banks, the few private ones that did such lending, like Axis, have burnt their fingers. Who will participate in the next round? Even the PSUs have been badly hurt, so unless there is a government directive, will they want to lend?
Lall: I wasn't talking of lending by PSUs or private banks. The biggest mistake we made over the infrastructure boom was pretending that PPPs would solve all our infra problems; the private sector simply can't take on the kind of risks we asked it to, and that is the main reason why we are in this mess. We adopted a flawed model because the public sector wasn't delivering. Ideally, the government should take the construction risks in greenfield infrastructure; if the completed project is transferred to the private sector, you'll have enough capital for well-run, recurring-income-generating infra projects.
Shah: Several projects that don't look viable today will be fine once the cost of capital comes down; we need to work on that. In India, the cost of long-term capital hasn't come down because there is considerable uncertainty and Risk of Doing Business. It could be spectrum getting cancelled, coal mine leases getting cancelled, payments not being made on time, contract enforcement taking too long-all these add to costs. As for affordability, we need to work both within and outside the banking system because this kind of infrastructure need can't be funded by the banking system.
Jain: How do you get something funded at an 8-10% interest rate?
Shah: Through asset monetisation. The government has earmarked about `3 lakh crore of assets for sale; these are assets that are earning money regularly. Even the private sector is starting to spin off such assets into AIFs, InvITs, and REITs; when you do this, you can start getting finance at 8-10% levels from global investors. You can then build the assets via government firms or private firms; there is so much patient global capital with pension funds etc, you just have to create a system. But, if state governments want to re-negotiate contracts (as Andhra Pradesh is threatening), this model can't work. Assuming there is no arbitrariness, India can lower costs of long-term capital considerably. We've created a great equity-market infrastructure, we need to create an equally great credit-market infrastructure.
Jain: Sanjiv, do you think it is possible to bring down cost of borrowing to 8-10% for long-term projects?
Bajaj: It eventually has to happen, but in the short term, it's tough. We've gone through 7-8 years of both lenders and developers losing significant amounts of money, and not everyone was crooked or inefficient. We need five years of good quality infrastructure growth for private sector and banks to believe that this is, once again, a good asset class. If the government takes on some of that risk upfront, it should be able to drop both costs, and risk. We need more FDI, and that can only come once risk comes down. Lastly, long-term availability of money comes from pension and insurance. But, in India, by regulation, 50% of our investments have to be put into government securities ; if this was not the case, we would be forced to look for long-term assets to take care of our long-term liabilities, which would build that long-term market for money, and for projects.
Jain: Ajit, would you agree that the model of infrastructure was wrong in that it transferred too much risk to the private sector?
Gulabchand: The appetite of the private sector depends on the risk-reward balance, and this is where honouring contracts comes in; if you don't get paid, the risks, and, hence, the costs of borrowing will shoot up, as will bank defaults. We rank 163rd in terms of honouring of contracts out of 183 countries.
I think the day Sanjiv Bajaj starts investing in infrastructure, and FE still awards him Banker of the Year will be the one when we've got it right!
Bajaj: I already did and quickly withdrew!
Rao: We are talking about pricing of risk, rather than availability of funds. The total savings in India is around $800 bn; channelising these savings into long-term suppliers of money, like PFs, and making them available for setting up these core sector industries is what is required. Then, pricing will automatically get adjusted; globally, PFs don't look for very high yields, they want a fixed interest rate for a longer tenure.
Jain: Are the recent corporate tax cuts enough to boost investments if the risk of doing business remains as high as it is? The risk could be the government not paying money, not honouring arbitration awards, trying to declare a patent (in the case of Monsanto) illegal, changing policy (after Walmart spent $16bn to buy Flipkart) ... Your own company, JSW Steel, is buying a firm in the insolvency courts, but legitimately wants certain government guarantees before that. If this is the risk associated with brownfield acquisitions, things will be much worse for greenfield projects. Do you think the era of big greenfield projects from the private sector is over, for the time being, at least?
Rao: As long as the bidding company takes care to put enough safeguards while taking over these companies, there is no issue. But, greenfield will take a little longer in India.
Lall: I don't think that the environmental risk, and the cost structure of doing business has improved sufficiently; we haven't even talked about enforcement of contracts and adjudication of legal conflict. Judicial capacity is a big bottleneck; the joke is that we have laws while China has order!
Any greenfield enterprise that involves legal and contractual complexity, and requires multiple agencies to be approached for approval processes is a real challenge. The fact that corporate taxes and the cost of capital have come down will provide a fillip, but will not provide the type of encouragement you need for the really tough sectors.
Jain: Most of the issues we're talking about have always existed, but we were once growing at 9.5%, and our investment-to-GDP ratio was at about 35-36%; this is now about 29%. How do you explain this? Was it just that the global economy was doing well? Or, did we all get caught up with the fact that we could do infrastructure in the private sector, and now that euphoria has dimmed?
Lall: Yes, there was a lot of euphoria. I don't think that we will see a return to investment-to-GDP ratios of 35% for a long time because a lot of what happened then was a result of big-ticket infrastructure. So, we will get more muted investment in the sense of when excess capacity runs out, investment would be forthcoming for the capacity expansion required. But, lumpy investment from the private sector to develop greenfield infrastructure is not going to happen anytime soon.
Jain: We've talked about funding debt, but who is going to fund equity? In the past, apart from the debt, the bank even financed your equity since many promoters artificially hiked the cost of the project, and used this to fund their equity. That story is over since banks don't have as much money, and are also more cautious. Aren't Indian promoters, by and large, too bankrupt, for now, to be able to fund equity of a big project?
Rao: Things have changed. The days of a promoter holding 100% of the equity for a good project have gone. If it is a good project, it is possible to invite either private equity or alternate fund investments, and from there, raise equity for the project. No one disputes the long-term story of India. Improving our investment-to-GDP figures is a matter, maybe, of a few years.
Gulabchand: The money is there, for both debt and equity. It is confidence that is missing. There were much fewer things available 15-16 years ago, but investment did take place.
You have to respect the entrepreneur who takes the risk, and once you do that, people are willing to bet on that man. Entrepreneurs don't usually have the money to fund their dreams, but they raise money because people believe in them. Today, the confidence is gone, with all manner of regulatory issues, and with governments dishonouring contracts. The moment you create the confidence, and the risk-reward comes to a balance, you will see that same amount of euphoria. As for top companies being cash-strapped and dying, the question is if this is because of a bad ecosystem or because of competition overtaking them?
Bajaj: We have a huge domestic economy. The most important thing is having policy stability and continuity. You need ease of doing business; the faster, the better. We need good quality governance, including from each one of us.
Shah: As you bring the risk down, the risk-reward on equity will improve. Capital is available, and with interest rates falling, equity should become more attractive. Also, the concept of promoters controlling companies will undergo a change-Sebi is working on changing from controlling promoters to controlling shareholders or sponsors. Additionally, with contract enforcement and stronger governance norms, we will get equity. If the risk-reward is right, this country has shown, equity is easier to solve than even bonds.
Lall: I think it is fair to say that the days of easy growth are over; you can no longer just throw a little bit of capital and get a lot of growth. The next generation of reforms has to do with creating the conditions for improving efficiency and productivity-that is a structural challenge. And, those are not easy; it involves ensuring contracts are honoured, payments made, the judiciary rules quickly on disputes... Our goal is to become a more formal economy, a more efficient, more predictable environment in which to do business. Getting there requires time, and patience. When that happens, you will see a resurgence of potential growth going back to 10%. Until then, we are good at 7%.