How do you think India has fared economically over the last year?
India has fared reasonably well. Not as well as it should be doing, but GDP has grown about 7 percent. The biggest thing has been the achievement of a stable macroeconomic situation. Inflation is down, deficit is down, and foreign exchange reserves are up. Compared to August 2013, when India was seen as one of the Fragile Five, we’re on much stronger footing. There have been problems like weak private sector investment response and the rather stressed balance sheets of both commercial banks and large corporate houses.However, India is poised to see 8-9 percent GDP growth in the coming years.
What do you think has prevented companies from investing in India?
After a period of growth between 2003-2011 and a poor agricultural year in 2015-16, there is a huge amount of excess capacity which caused a slowdown in demand. That said, foreign investors are quite bullish on India, as the inflow of foreign direct investment has been at record levels, and continues to be so.
Do you think foreign companies entering India are targeting their investments in the right places?
I certainly think so. They’re responding to structural changes in the Indian economy, recognizing the growth floor is 6 or 7 percent, while the ceiling is much higher. Additionally, the Modi government has made a significant effort to ease the business climate to attract more investment. The Make in India initiative is beginning to have an impact on facilitating business and investment. Foreign investment is responding to the correct cues and investing in areas like infrastructure, the financial sector, and defense production.
How has the Make in India program developed since its introduction?
I’d give Make in India a 7/10 because at present it is work in progress. Prime Minister Modi has said he wants India, which is currently ranked 142nd in World Bank ease of doing business rankings, to be in the top 50 in the next three years, which is very ambitious. The government, in conjunction with the World Bank, has created a ranking system for how the Indian states have facilitated investment. This represents the beginning of competitive good governance on the part of the states. There has also been an effort to attract multinationals. Foxconn is here, Microsoft will manufacture phones here, Cisco is investing in manufacturing capability, all of which will show results in the coming years.
The only problem has been with commercial banks, which have landed up with a huge amount of non-performing assets, amounting to nearly $200 billion! This implies that commercial bank credit flow to industry has been very tight. In fact, it has been in negative territory for the last year. Also, private investment has actually turned negative in the last quarter (October-December 2106). The results of Make in India are mixed because while there has been a very large inflow of foreign direct investment, the domestic investment scene remains very weak. This might be the result of what is called The Twin Balances Problem to which I have referred earlier. There was a huge credit expansion between 2003 and 2011, whereby a number of financed projects have now become unviable. It may simply be a matter of time before bank balance sheets are repaired and the appetite for new investment will increase again. Furthermore, a greater cause of worry is jobs have not been increasing in India in recent years.
“Foreign investors are quite bullish on India, as the inflow of foreign direct investment has been at record levels”
What options are available to the government and private sector banks to deal with the congestion caused by non-performing loans?
One option is to find money to recapitalize these banks. The second is get public sector banks to divest their equity and raise capital in the financial markets. The third would be to establish an asset management and reconstruction company to take over these bad assets, thus improving the balance sheets of commercial banks, especially the public sector banks. The fourth option is for these banks to take a haircut. All four options are being considered. I advocate letting go of fiscal deficit norms and using a decent amount of public funds to recapitalize the banks so legacy issues are taken care of. Then I’d implement strict measures to prevent new loans from becoming bad again.
What makes you supportive of the approach that you mention?
The government has more fiscal space than what it is estimating, and therefore should use it to boost the economy. Recapitalizing the banks and hiking public capital expenditure to keep affordable housing and infrastructure is a more immediate way to prime the economy.
I know you’re close to this issue, given your recent appointment to the central board of the Reserve Bank of India, but is there a sense of how soon relevant public bodies are ready to move on something like this?
I’m not sure at all, but I could see a decision being made on one of these four steps in the next few months.
What do you see as the greatest opportunities for investors in India in the next few years?
Infrastructure is at the top of the list. There is a lot needed in terms of highways, renewable energy, ports, aviation, housing and more. Demand and potential returns remain very high here. India invests a maximum of 3 percent of its GDP in infrastructure, and this should be closer to 5 or 6 percent. The government has established the National Infrastructure Investment Fund, which is aimed at enhancing infrastructure funding. The second big area is agriculture, which desperately needs to be modernized, particularly water conservation and irrigation. With adequate investment, there is real potential for a massive transformation of the agriculture sector. Education and health are also attractive, as well as export-oriented industries and tourism.
When we first met, you told me investors need to have strategies for individual states or provinces, rather than an overarching India strategy. Has this changed under Prime Minister Modi?
No! India is a continent, so investors should have state-specific strategies. You can only do so much in New Delhi. The real game is in the states because of the diversity in geography, economy and culture. GetGlobal would do well to help investors prepare state-specific strategies.
What do you mean when you say the game is in the states in India?
Our constitution devolves a great deal of power to the states, whereby they become the regulators of their own investment climate. Acquiring land, securing electricity connections, or obtaining business licenses will all take place at the state level, similar to the US. There is inter-state competition for attracting business on the same lines as in America but not as robust so far. This will change in coming years with State government acquiring more powers and role. Indian states have more significant cultural and language differences between them than in the US or even Europe. Therefore, just like investors focusing on individual countries in Europe, they should focus on a specific state in India and not spend too much time on preparing an over arching India strategy.
Which states have been the best economic performers under Prime Minister Modi?
Five or six states have done particularly well, and they are mostly in the south of India, or the west. The bright stars are Tamil Nadu, Karnataka, Andhra Pradesh, Maharashtra, Kerala and Gujarat where there is a great deal of competition. The second tier is Rajasthan, Madhya Pradesh, and Orissa, where chief ministers are trying to attract investment. Investors can find excellent demand and opportunities in these nine states.
Our readers should understand you not only work for the Reserve Bank of India’s central board, but you are also part of a community of experts the government relies on. This being the case, what changes do you see between the Trump Administration and the Modi Administration?
We’ve already seen changes with immigration policy and the H-1B visa affecting our IP industry already. There is a lot of apprehension about what will come from Trump’s “America First” policy. At the same time, there is a feeling that India could make a deal with the Trump Administration, given his business background. My own feeling is the Trump Administration will be dramatically different from the Obama and Bush Administrations, who thought the US ought to have India as a strategic partner. The Trump Administration could become more transactional, and India could face pressure to change its stance for example on the bilateral investment treaty or its IP regime.
What is your sense of anti-corruption initiatives in India?
They’ve been a huge priority, one of Prime Minister Modi’s main focuses. Transparent, rule-bound government has been Modi’s strong suit, and it is likely to keep improving. This, in turn, will make investment planning far easier for foreigners.
Other than demonetization, many anti-corruption measures have been very targeted. What are some others?
There has been a huge push for the digitization of tax administration, which has already seen massive results. Personal income tax revenues are up 17 percent despite the economic slowdown. Another is the increase in online governance for industrial licenses and permits. This directly attacks bureaucratic corruption in the system.
What should people be looking out for from you in 2017?
I am going to devote a lot more time with the Pahle India Foundation which aims to ‘facilitate economic policy change in India.’ This goes beyond giving policy suggestions and ideas to trying to ensure their operationalization through targeted interaction with government functionaries at all levels. PIF will thus serve as a bridge between industry, the government, and the academic community. This will also require PIF to work actively on generating a higher level of trust between different stakeholders.
My second focus will be on ‘The Next 500’ companies outside the top 100 -200 in India to tap into their dynamism and facilitate their expansion and linkage with global and regional production networks.