Though the budget has set a target of a $5-trillion economy, there is criticism that it lacks specifics, there is no road map. Your comments?
Kumar: The road map to be a $5-trillion economy is very clear. We require 11% rate of growth in nominal terms from where you are, until fiscal 2024-25. The reforms done in the last five years, and the budget now, which is a very pro-private investment budget, has set the stage for us to overcome the current slowdown… the stage as well as the path ahead have been laid down quite clearly, especially with the focus of the budget, which insists that the government will depend on private investment and bring about a change in the investment cycle, and for which there are about 12 measures in the budget.
What is your assessment of the current economic situation? How deep is the slowdown?
Kumar: We are all concerned — that’s how I would put it. I would use the term deeply concerned and the fact is that no one in the government would deny that there is a slowdown and the kind of information that you are getting about investment, consumption and external demand shows that the slowdown could persist if measures were not taken. But the good news is that measures are being taken.
Has the government done enough to reverse slowdown?
Garg: My assessment is that it’s not a very deep slowdown. We are accelerating things. It’s a temporary slowdown driven by some sector-specific events. For example, automobile is one sector undergoing a very deep structural transformation.
How long do you expect it to last?
Garg: It should last latest until the third quarter of this financial year and from the next year, things should improve. India’s estimated growth of 7%. I do not know why we are categorising 7% as slowdown. It’s our high expectations. My sense is that number one, there is no real deep slowdown. It is temporary, it will reverse very soon. Now… the budget road map. If you are looking for a road map on things to be done each year and the kind of growth to be achieved year after year, that kind of thing is not there in the budget. I think this is symptomatic of the old, planned economy mindset. What will work is whether you can get the private sector to invest because investment-driven growth would be the real growth… I would call it strategy rather than a road map, and there is a lot of strategy in the budget. I can recount what has been done for investment, what is done to change the government ownership into private sector. So, envisage four to five years from now an economy that is much more dominated by the private sector, where the private sector is investing in infrastructure, manufacturing, services, etc, and the economy is growing at 8-9%.
As Kumar said, if we have a nominal growth rate of 11-12% and foreign exchange depreciation was 1-1.5%, we are there at a $5-trillion economy in 2024-25.
Abheek, do you agree with the diagnosis of the problem here that the economy faces right now? Do you think it is not a deep slowdown and we can reverse it soon?
Barua: The fundamental question one needs to ask is whether it is cyclical or structural. There are a lot of cyclical elements built into this. In fact, in the middle of 2018, we were looking at a situation where capacity utilisation had picked up in a number of sectors and there was a sort of tiny glimmer of hope of private investment coming back. After that, a bunch of things happened. One was the NBFC problem. The second was the usual prebudget uncertainty, which forced a lot of potential investors to push things back.
What I think was very critical — and it is perhaps commendable for the government — was that unlike other elections where you get a hop in spending, presumably to get votes, this time because of a revenue shortfall, there was a massive compression in expenditure. So, all these factors came together and on top of that you had the long-standing issues of clean-up of the financial sector, etc, the bad loans in the NBFC sector. So yes, there is a slowdown. There is a strong cyclical dimension to it. Cyclical, not in the textbook sense of an inventory build-up, but a cyclical slowdown set off by a set of factors.
Cyclical, by definition, means short-term, and once the government starts spending again, because the compression phase is over, you might see signs of recovery and capacity utilisation… So, once you get the confidence back and things start moving, perhaps you will see the investments turning.
Sumant, do you agree with Subhash’s statement that this budget contains more measures for investment?
Sinha: Two of the big issues are linked strongly to each other, which we’ll have to watch and see what happens. One is the issue of liquidity. In the budget, there were a number of steps that have been mentioned about liquidity enhancement. I think capitalisation of the banking system was one — perhaps the number could have been higher. But I’m sure the government had constraints on the fiscal deficit issue that they had to watch out for.
The second is what they’re doing on the NBFC front, which is trying to come up with this contingency type of framework, which deals with the NBFC problem without enhancing moral hazard and so on. So, they’ve tried to come up with some formulation around that. Let’s see how both of these impact the system.
You will see investments begin to pick up if liquidity comes back and if the cost of capital begins to go down substantially. Now, neither of these significantly emanates from a lot of the issues in the budget. But the budget also had a lot of other factors, which are at some level, policy statements, and therefore we need to see how they get enacted. The foremost, of course, is the one on investments in infrastructure, where a target of Rs 100 lakh crore was spelt out over a five-year period, which is a very, very sizable number, if you think about it, and $1.4-1.5 trillion over a five-year period is a very sizable number.
A lot of those, if they get implemented properly, you will see pick-up beginning to happen. If that happens, along with liquidity and cost of capital coming back, then you start seeing confidence in the sector beginning to pick up. My only issue with the budget was increase in taxes. Because if you, as the government, are trying to revive animal spirits, then animal spirits have to be revived. You can’t depress animal spirits at the same time.
Vinayak, you have been watching the infrastructure sector. The Rs 100 lakh crore — where is that going to come from? From the private sector?
Chatterjee: I am going to be a little contrarian and, possibly, uncomfortable. To classify this current phase as cyclical, I think, does a great disservice to the current state of the economy. Right from bank recapitalisation to NPAs to the stress in the power sector to the competitiveness of Indian economy, these are deep-rooted structural issues. So far as I’m concerned, demand compression is far more widespread, far more critical and far more affecting the sentiment of not just Indian industry, but of the average Indian citizen, than we are prepared to face. If you take the BJP manifesto, if you take the economic policy and if you take the budget, all of them, I give full marks for creating what is called, in different points of English, track, strategy, vision, road map. I’m not denying any of that.
I have no quarrel with the direction that the government has set, but the issue is that the track has been laid. From Indian industry and from Indian citizens’ point of view, I now want an engine that’s pulling out of the station. It’s not enough for me to stand at the station and view the track.
Subhash, could the government have relaxed the fiscal deficit this budget? What held you back from doing so?
Garg: The fiscal deficit is an extremely important economic narrative. It affects so many things, many times we don’t consciously recognise that. After this 3.3%, which is a signal from 3.4%, which was announced when the interim budget was presented, interest rates have come down by more than 1%. Think of what a 75-basis points repo rate will have, a different effect. But 1% reduction, everyone’s cost of borrowing — for corporates issuing bonds — is affected. You have the option of sort of relaxing the fiscal deficit and giving stimulus to the economy, which normally gets translated into a higher growth. That can come in two ways — one what Chatterjee was trying to argue — that use this to invest in infrastructure and other kinds of assets. Unfortunately, that does not happen in the short term.
So, if you want to earmark for making this kind of investment, probably that money would have remained underutilised and not had that kind of effect. It works normally by boosting consumption, by providing some tax credit or some support or assistance, which works immediately. But that is, in my judgment, very dangerous. It is not that we have not witnessed it. Go back to 2008-09 and later, when India was faced with a slowdown after years of bumper growth. What happened? We relaxed the fiscal deficit. What happened? You saw so much of inflation, you saw so much of the growth slow down after a very small period — it doesn’t work. So, I think it was a very conscious decision that let us not to go the route of fiscal expansion, stimulus, steroids, but go to the real long-term path, which can deliver, and which is investment. If you can bring down the rate of interest in the economy, you can incentivise investment. You might miss for three months or six months or nine months, which is fine, but the long-term trajectory is not compromised.
Rajiv, we have seen this divide here, Abheek and Vinayak have a different diagnosis, you and Subhash have a another diagnosis…
Kumar: I did not give a diagnosis. I have said and I stand by that. We have noticed a slowdown and we are concerned that it might persist and we are committed to not let that happen. And the question is that if you call it a structural thing, then you foreshadow it, there’s no way that you can get out of it. Nobody can argue that because, in fact, most of the structural factors that are needed for growth are now in place. In fact, the formalisation of the economy that’s taken place in the last five years has meant that now any growth that comes will be far more sustainable than a boom-and-bust thing.
I’m not sure why people don’t give that enough credit. The formalisation also means that the rules of the game have changed in many major ways — IBC, RERA, Benami Act, GST. Now, all of this means that the economic agents on the ground are having to adjust to the new rules of the game and that’s what’s beginning to happen. Now, the issue here, and these are not negative structural factors, these are structural factors that have been corrected for faster growth and more sustainable growth in the future. My argument has been — and I’ve been saying this since September, especially after IL&FS — that such changes, which require a huge behavioural change, need a lot more grease of liquidity than what you have in the system, especially after September when about Rs 2.5-3 lakh crore is probably short to what it would have been in a business-as-usual situation. Had there been no IL&FS, you would have had, in my calculation, about Rs 2-3 lakh crore more, because of what NBFCs have done in the past five years, the way they had grown at 20% per annum and quadrupled their balance sheets in the last five years.
Now, those balance sheets have shrunk. That’s the loss of liquidity that you have. Now, who has made up for that liquidity? I’ve just seen a figure that the M3 to GDP ratio has declined. Again, this is not something that is not amenable to policy measures. But the fact is that the government, as Subhash knows, is completely cognizant and sees all this and, therefore, has announced a series of measures, more will be forthcoming. Not all of them could be announced in the budget, as Subhash said. For example, asset monetisation, I know that in NITI Aayog there is a committee which has recommended close to about Rs 1.6 lakh crore asset monetisation, which is not all your brownfield assets. The question that arises is that who has the capacity to take these on? You can talk about PPP, but are there companies now, after what is happening between 2011 and 2016, which have the capacity to take this on?
I am not so sure any longer. So, therefore, would you want all of these to be foreign owned? I am told that 206 of the 269 toll roads today are owned by foreign financial companies. May be that is the way forward. I think FDI should come in much more in greenfield than brownfield investment.
On NBFCs, you said there is a huge issue here. Could we have not taken some radical measures?
Kumar: In 2013, Raghuram Rajan himself opened a window, when the rupee was in a free fall. RBI opened a window saying that they will backstop any losses in the NBFC and the banking sector and that window was never used but brought back the confidence in the system and liquidity started moving again. The fact that something could have been done to ameliorate the impact, but there again, with all due respect to everybody concerned, the feeling was that this is not such a big deal and this is a market correction. Somebody has written today that people who have over-extended themselves need to pay the price. I agree with that but at the same time one must remember that one must have much more sophisticated instruments for measuring whether something is systemic or not. Garg: In 2012-13, the facility which was announced was `50,000 crore for that time. This was not utilised because probably there was no need for it. And this time, we have, in a way the budget has announced, about `1.32-lakh-crore facility.
Abheek you have been watching the banking sector, you have seen the NBFC sector, but we are allowing this issue to prolong…
Barua: Yes, I think there is more liquidity in the system. We are now in surplus liquidity. Risk rates for lending to NBFCs have gone down. Banks and NBFCs tend to operate in overlapping spaces, take the case of finance and housing. The substitution hasn’t been dialling in perfect because NBFCs were targeting a certain category of individuals or borrowers who the banks are not entirely comfortable with and I think that there is some substitution that is happening. But it’s very difficult to give a clean line of credit to NBFCs. So, if you do it through the banks, you have some checks and balances there. That’s exactly what has been done. What has happened is with the media and the hue and cry about the NBFCs, a lot of the good quality NBFCs, I can point out that these 25 of them have gotten short shrift, because of entities that have been errant. So, it is being sorted. It will take some time, there will be a clean-up.
Sumant faces a unique problem of contract enforcement. In the current environment when these things are happening with private sector investment, what happens after that?
Sinha: Some of the discussions going on are because there is a certain degree of angst in the corporate sector, which I think is being recognised, to an extent, by the government. But the corporate sector really expected the government to do a little bit more, come out with specific steps. And as Mr Garg pointed out, the government took a very conscious decision to go for the more longterm sustained improvement rather than to go for a shorter-term fix, which might have been more palatable. Whether the long term ends up being the better way forward, only time will tell because these things take years to play out. In the meantime, are we into a much deeper slump – again, time will tell? Now, in terms of the other point that Dr Kumar was making, which is a very important point, which is, the government wants to monetise assets. We want to answer your question. A ton of new investments will happen, but the reality is the corporate sector does not have the wherewithal at this point in time. That is the stark reality. When issues like what you mentioned happened, as in the case of the Andhra Pradesh situation, it really shakes the very foundation of the entire investment thesis in India. If there is no sanctity of contracts and there is no enforcement from the courts in a quick manner, then actually even whatever investments we’re getting is not going to be happening. So, this is actually a pressing matter. While it impacts the renewable energy industry in the state of Andhra Pradesh, it has very widespread ramifications of national importance. Therefore, I would really urge the government to deal with this issue in a very, very serious manner.
Subhash, would you like to respond?
Garg: Renewables has been one sector where we have seen investment actually expanding for quite some time. But there are some issues which have come up — Andhra example has been made, but a much deeper example is the sanctity of contracts, which essentially means that you are not getting paid for supplying the power which you will generate, and unless you make payment for the power you buy, you can’t hope to get investment coming. In fact, it might jeopardise even the existing investments, which it is doing, which will become NPA and you see a lot of this in the power sector… So, if we have to get the investment story right, we’d have to sort these things out. We’ll have to ensure that payments are made. Anything or anybody who buys must make the payment. In past many years, we have tried to find solutions. The only thing which we must ensure is this — some effort is being made now, the power ministry has issued instructions that the letter of credit has to be given first, otherwise the power will be cut off… Let me also respond to the monetisation of assets and how it improves investment. PowerGrid roughly makes about Rs 15,000-20,000 crore investment every year. If it can raise `10,000 crore, its investment need is met. The same amount becomes available for other investors. That is how it helps the government to continue to make investment and also the private sector to come and make investments. That’s very necessary. Responding to Dr Rajiv Kumar, I would say since we sort of pre-empt so much of public savings in India for government investment and very little is left for private sector investment, I think for some years we will have to be very welcoming to foreign investments, which are available abroad in pension funds and in sovereign wealth funds. They are sitting on investable funds and we need the investment. Third, $17-trillion bonds are yielding negative interest rates in the West. We are still not a $3-trillion economy. They need investment avenues; we should get them. Even if it comes in the form of brownfield investment, it actually helps more greenfield investment.
Vinayak, why should foreign investment in brownfield infrastructure be a concern?
Chatterjee: Infrastructure segment has three buckets of investment — development risk, construction risk, operating risk. The foreign investor is extremely wary of development risk and construction risk, so they are today very comfortable and Mr Garg said they are sloshing around the capital markets, waiting to take operating brownfield assets… I’m fully in sync with what Mr Garg said. I’ve been advocating asset monetisation for over 10 years now. It is now fashionable to talk about it. I’m listening to all the conversation, there are very clearly two perspectives that I am taking back. One is, if you speak to anybody in the governmental system, the view is reasonably similar – we have laid out a track, various systemic changes have been made, as Dr Rajiv Kumar pointed out earlier — RERA, IBC, GST, e-way bill, etc. Your laundry list of good stuff that has been done, no denying it. Now, the worst is behind us. Sit back and watch the 8% plus 5% play out and take 11-12%. The second point of view, which I am representing the views of many people from private industry, is that in the current situation of demand compression and liquidity crunch, it is not enough to say that things will sort themselves out within three to five months. Mr Sinha said it far more politely than I did, saying that we are sitting at the cusp where history will judge whether this path has been espoused by Mr Garg or by the finance minister.
Garg: Can you do something to align with this path which has been chosen?
Chatterjee: So the point is there is a vast number of newspaper readers, TV watchers, analyst watchers, waiting for some specific steps right now, in the next 30 days, 60 days, to see what is the specific step the government is taking to put money in the hands of people that will reverse, shall we say the decompression of demand.
You were behind the budget that we just saw. Savings are down, investments are down, demand, of course, is down. What was the need to raise taxes?
Garg: The first part is not factually correct. Investment in the last quarter was high, also capital formation was higher, growth was there. It was not down in that sense, right. But to come to your question about tax. I think what persuaded the finance minister to go for this was the temporary situation. You had a gap in your revenues and your expenditure requirement. So, she went for two major measures — one was to raise `2 per litre on diesel and petrol. That provided on an annual basis something like `30,000 crore. Since the gap was about `40,000-45,000 crore, I think the choice was made. I hope it’s temporary.
The minister in an interview to ET said the taxation on FPI was an unintended consequence. The idea was to tax only the super-rich. But these are the investors who are investing in the country. With this kind of increased taxation, would they continue to do so?
Barua: I have a very clear view on this — I think it needs to be reviewed… I think we might need to rethink, maybe to take some revenue losses, hope that passive monetisation, with the disinvestment target being larger than what they have put in the budget, that’ll be easier. One of the things I liked about the budget is that it found innovative ways of addressing the fact that there is enough money to fund the kind of borrowing needs the government has. On top of that, if you want to borrow, to support Vinayak’s plan, I think you would just have, you know, one thing going up — money in the hands, aggregate demand going up, and interest rates pulling them down.
As NITI Aayog, the government’s think tank, what would be your advice to the government on this FPI issue, on the tax on FPIs?
Kumar: The FM herself has said that there would be a review of this.
Garg: So FPI, I’d also mentioned it, was not in the frame in the surcharge that was raised. It’s a little collateral kind of consequence. They are quite vocal. The FPIs basically make investments in the secondary market. They don’t make it the primary market. If you were to look at the economic and financial consequences of what their behaviour might be with our share markets actually being in very high PE ratios, it’s not in the economic disinterest of the country if slight exit takes place. It also doesn’t affect the real investment in the economy. But still there was an attempt on how we can find a way out to sort of at least take out both FPIs, which represent smaller investors, don’t represent the cash rich. It becomes very messy. It has not been possible to find a way out. Then the conclusion is, which I also read, and the finance minister also had very clearly spoken — I don’t think anything is going to be done for them in this year.
AOPs have been impacted by the surcharge as well. A lot of infrastructure investments come as AOPs…
Garg: So, then there are other areas, AIFs, sovereign wealth funds. I think they’ll find a response, an appropriate response for responding to the tax question. If it turns out to be not longstanding, maybe the situation will resolve in due course on its own.
Sinha: For a small amount of fundraising at the government level, you know, the kind of damage that it does to sentiment, that is hard to measure… So, the general feeling is that India is dis-incentivising foreign investment in some way, shape or form. That then just percolates into a lot of other areas. So, my advice to the government is basically, be responsive to foreign investors because, as we discussed earlier, they’re the ones, the guys with the capital… the general perception that will get created is that India is not really looking for foreign investment and we are not really rolling out the red carpet for them… my advice would be to change it. It doesn’t matter for a couple of thousand crores.
On sovereign borrowing…
Kumar: I agree with Subhash, when you had said earlier it was and there was nobody in the government who disagreed with that proposal, to the best of my knowledge. The fact is that we are so under leveraged, 5% of GDP is external debt today. That we will get into a crisis at once, is going too far. We are all very rational people, in North Block, specially.
I want an answer to a specific question, specially of Rajiv and Subhash: Where do you see the investment logjam breaking?
Garg: Let’s divide that into two parts. One is the government and the other is the private sector. Many times, we forget that the real investment from the government side, of the public side, comes from the public sector entities… In my sense, public sector investment will still be rising and rising reasonably well. The challenge to my mind is to get the private sector investment to come up. There, the story is more complicated. We have to get several reforms done sector by sector. There are several issues connected with that, if we can get those policies right and create the environment for the resources to be available, especially from foreign sources now, the investment will start flowing.
Kumar: To elaborate more, ours is one of the most underleveraged economies in the world. Our private debt-to-GDP ratio is down to about 50-odd%, while it is much higher in the US and China. That means that the credit offtake by the non-food private sector, as you know, has slowed down considerably. That’s also because of the banking sector. So therefore, the capitalisation that we talked about is the source of that funding. With that capitalisation, leveraged by six times — banks can generate up to `6 lakh core of new credit demand. The point, therefore, is that source of funding for investment is not an issue. I can cite you other examples. What you need is one, the sector reforms that Subhash has referred to. Also, what you need to do is the financial sector reforms, which I’ve been insisting upon for some time now… But those reforms are essential for us to make the banking sector the conduit of growth. Because in China after 1990-1992, most of the growth came from higher leverage in the economy.
As we wind up, I have one question each to all of you. I’ll start with you Rajiv. In the near term, what are the three or four or five steps that the government could take to kickstart the economy?
Kumar: There are three. The one that you will see very soon, the two labour codes, are already in there. We see the third going in for industrial relations, which has got some significant changes in terms of limits and overtimes and females. I am sure that will give a boost to investment. Subhash mentioned `1 lakh crore, I see the scope much bigger. If you include asset monetisation, disinvestment and privatisation, you can do much better and why not use foreign money available for this? NITI Aayog has done some numbers and I think the figure can be much larger. The third thing that has never been talked about: the government’s own capital output ratio. We, as a government, are one of the least efficient users of our own capital… … there is a lot of hoarded capital in the government, which we are trying to now work at through these measures of assets. This will take us quite far in terms of getting the revenue that we need for infrastructure building, but I know that there is a large gap. I’m quite sure that with the higher leveraging, capitalisation on the banks, and this greater efficiency of government capital, we can meet that gap.
Subhash, you have just moved to the power ministry. What kind of reforms are you looking at in the power sector? There are huge issues there.
Garg: The biggest impact maker in the sector is: Can we get the power sector finances, including the payment system, right? We have had several solutions in the past, they have not worked. This time it has to be a private sector-oriented solution. So that’s one thing which we would like to work on. Second, to supplement what the government has done, announced about a large-scale, sort of disinvestment and monetisation and I think the power sector has enormous potential for doing it, we have some companies to list. We have some companies to disinvest. We have some mergers to complete. We have assets for more monetisation to be done. If we can contribute to the government’s disinvestment programme, government’s privatisation programme, that would be a very good addition. Third, in my mind, we have some structural kind of weak segments in the business. We have about 25,000 crore gas capacities, which have, in my judgement, no future. So, there are also other segments that, can we sort them out? Can we find solutions for those, the real solutions?
Sumant, for your sector and overall business in mind, what is your expectation of the government in the near term? What can you do to boost demand?
Sinha: The government has taken a view and I’m quite happy that they’ve taken a longer-term view — there’s nothing wrong with that. To me, the key to revive the economy is to somehow reduce the cost of capital in the economy. And that is, to me, the No. 1 fundamental issue. That can come through more liquidity in the system, it can come through better handling of the NBFC situation, it can come through getting more foreign investors to come in, it will come through lower borrowing by the government — there are many ways, many things have to be done to get the cost of capital down. If you go back to the early 2000s when we had this phenomena, you know, growth in the first few years of that decade, a lot of it was fuelled because the cost of capital came down quite dramatically. So, that’s really the one thing that we have to focus on because today, the cost of delivering any service, because of the high investment cost, is just very high… So real rates of interest in the economy are very high. And to me, that is the biggest factor that is constraining the momentum in the economy from going much faster…
Vinayak, what is the solution in the near term?
Chatterjee: Four solutions. No 1: Increase the fiscal deficit by 0.3 percentage points and ringfence it with the National Infrastructure Development Fund audited by whoever is the relevant auditor so that the public at large is not percussed. No 2: A very aggressive monetisation action agenda, not just a wish list, with clear announcements of targets and responsibility centres. No 3: A strident revival of PPP and preferably with a separate department in the ministry of finance or in NITI Aayog on revival of PPP and everything that has to be done with it. And the last point is just a note of caution. I accept the point that Dr Rajiv Kumar made about capacity in the banking system to lend `6 lakh crore more but let us not make the asset-liability mismatch mistake again. Infrastructure cannot be funded by commercial banks. So that `6 lakh crore should be nicely kept aside for industrial capacities and other capacities. Infrastructure cannot be funded, particularly in the first two portions of the greenfield infrastructure, which is development risk and construction risk, by commercial banks. …the sector requires a DFI. So, I’m recommending immediately developmental financial institution for the infrastructure sector, however backdated and unpopular the concept may be. It is relevant and I am arguing for it. At least, it will lead to a lot of galvanising of action, of finance, of capacity enhancement, credit enhancement, all the kinds of stuff under one roof.
Abheek, you said this was cyclical. So, what is your solution? What are the quick things the government should do?
Barua: I’m fundamentally against the idea of things being too quick because I think the financial system clean-up will take some time, we have to be patient. And although I live in Delhi now, I am a Mumbaikar at heart — very pedantic. I work for the most boring bank in India. So, the one thing that I would like to say — and taking off from what someone said — the cost of capital, so they could have all these ideas sitting in Lutyens Delhi or Gurgaon or whatever. But what the financial consequences are in terms of very, very boring world of credit demand and supply and bond markets, completely mind-numbing world. But that should impose some discipline on the viability and visibility of doing certain things. For instance, I think fiscal expansion at this stage is perhaps not such a good idea. So, it’s over to the governor? Barua: To the governor, to some extent.