Outlook Business | Leading Edge 2018 - Growth In An Election Year
Executive editor, V Keshavdev, moderates a panel on what the general elections of 2019 would mean for the economy with Vinayak Bahuguna of Arcil, V Vaidyanathan of Capital First and Neelkanth Mishra of Credit Suisse
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Music: Hooksounds
#LeadingEdge2018 #ElectionYear #Business #OutlookBusiness #OutlookMagazine #OutlookGroup
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Music: Hooksounds
#LeadingEdge2018 #ElectionYear #Business #OutlookBusiness #OutlookMagazine #OutlookGroup
Transcript
00:00 [MUSIC PLAYING]
00:03 Well, ladies and gentlemen, we are all
00:14 aware that the current government's tenure comes
00:17 to a close early next year.
00:19 So to understand the context in which the 2019 general
00:23 elections will be held, and what would it really
00:26 mean for the economy, I would like
00:28 to invite on stage our lead panelists today.
00:31 Once again, please put your hands together
00:33 as I welcome founder and executive chairman
00:35 of Capital First, Mr. Vaidyanathan,
00:40 Mr. Neelkanth Mishra, managing director and India equity
00:44 strategist, Credit Suisse--
00:47 I apologize-- Mr. Vinayak Bahuguna,
00:51 managing director of Asil, one of the biggest asset
00:54 reconstruction companies in the country,
00:57 and of course, moderating the session
00:59 will be Outlook Business executive editor, Mr. V.K.
01:03 Shravdev.
01:05 Thank you, sirs, for joining us.
01:07 And with that, over to you.
01:10 Hello.
01:11 Yeah, that's a surprise pull-off.
01:13 Yeah.
01:14 Good afternoon, everybody.
01:15 Thanks for taking time out from your busy schedules
01:18 to attend the second edition of Outlook Business Leading Edge.
01:23 And it's my pleasure to kick off the first session of the day,
01:29 growth in an election year.
01:34 We have a very good panelist out here,
01:36 and we hope we dish out something
01:37 which will be as good as the deserts
01:39 after a sumptuous lunch.
01:40 So to put the context, I think for the first time
01:45 in several decades, we are looking
01:48 at a government from whom the expectation levels are
01:51 probably the highest.
01:53 I mean, we have seen four years of the Modi government.
01:56 We have seen a slew of reforms that has happened.
01:59 But slowly, the narrative is changing on the ground,
02:01 because GDP growth is plateauing.
02:03 There is inflationary pressures that
02:05 is coming, both from the crude and the MSP side.
02:10 And clearly, job creation is not happening at the pace
02:14 that it was promised.
02:16 And we are heading into a year-- this year,
02:18 we are going to see eight state elections, of which three
02:22 are going to be in BJP-held states.
02:25 And then we enter the next year, which
02:27 will be in general election.
02:30 So let me start off by asking, Neelkanth,
02:33 you have been covering the markets for close to 15 years.
02:36 Never before we have seen so much anticipation
02:38 around state elections and general elections.
02:41 So what is your reading?
02:42 What is your understanding of how this government has fared?
02:45 And you keep interacting with foreign investors
02:48 nearly on a daily basis.
02:49 So what is the sense that you get from it?
02:52 I think there have been quite a few very structural reforms
02:56 that have been undertaken.
02:57 So the risk of sounding repetitive,
03:01 things like GST, the insolvency bankruptcy
03:04 code, even things like RERA.
03:07 I think if you had asked someone three, four years back,
03:11 were these very likely to happen in the space of, say, one year,
03:15 and people would have dismissed that.
03:17 But these changes have happened.
03:19 The economy got disrupted while these changes
03:24 were being implemented.
03:25 By and large, I think it has stabilized.
03:28 So many indicators are showing that the economy
03:30 is starting to revive.
03:32 But I see a few risks going forward.
03:34 The first is that the recovery right now is very lopsided.
03:39 So while the indicators at the upper end of the consumption
03:46 spectrum are very strong-- so airline traffic growths
03:49 and durable sales, car sales, they're doing very well--
03:52 at the bottom end, things are still not looking good.
03:57 So if half the economy, which is, say, in agriculture,
03:59 is not consuming, it's going to be very hard to--
04:03 so they see the economy really flourishing.
04:05 The second change that has happened,
04:08 particularly in the last month or so,
04:11 is that the recapitalization of PSU banks,
04:15 which had been undertaken in late October,
04:19 now after the new RBI guidelines,
04:21 the capital requirements in the banks will go up substantially.
04:26 And so the growth capital that people expected
04:30 would be available to them would be no longer available.
04:33 And particularly in the light of the scams that
04:37 have happened as well, I think decision making can slow down.
04:41 And that can also affect as a drag on growth.
04:45 One final point on the fiscal side,
04:47 there is the government's intention, generally,
04:51 in a pre-election year, is to stimulate
04:54 the economy in a big way.
04:56 This did not happen in the union budget.
04:58 The expenditure to GDP ratio continued to fall.
05:02 We have seen now the lowest number since 1980.
05:05 But in some states, like, say, Rajasthan,
05:09 Rajasthan government is hiring 1,000 to 10,000 people.
05:12 They've given wage hikes to Anganwadi workers.
05:14 So those are typical pre-election steps
05:18 that governments take.
05:19 At the union level, I didn't see that kind
05:21 of a stimulus in the budget, which in a way
05:23 is good, because that leaves more fiscal room,
05:27 or rather more room in financial savings
05:30 to stimulate the private economy.
05:32 Get back to that.
05:36 Is there too much of attention, or the government's time
05:40 and money is going only addressing
05:42 the supply side of the issue?
05:43 So we are talking of bank recapitalization,
05:46 NPA resolution, and the so-called easing of business,
05:50 that kind of-- just for you to set up shop.
05:53 But what is it doing to really spur demand and growth?
05:57 Because we are already seeing credit growth,
05:59 which is like the biggest.
06:00 Let me just take one step back before I address that question.
06:09 I have no doubt in my mind that this government has
06:12 been really reformist over the last five years or four years.
06:17 And let me give you two or three instances
06:19 to support that point.
06:22 Right from the beginning, when they linked fuel prices
06:27 with the market prices.
06:29 Now, this was theoretically the correct decision.
06:33 Should have been done maybe a decade ago,
06:35 but maybe two decades ago.
06:36 But for some reason, India was running
06:37 some huge fiscal deficits on this front.
06:39 They were importing oil at a particular price
06:42 and selling it at half the price in India.
06:43 So that is one significant reform.
06:46 The second is making sure that direct benefit transfer
06:51 through the Aadhaar process goes on.
06:53 So when you think of some of these macro level reforms
06:57 the government has done, they've done some good work,
07:00 which is why the fiscal deficit under control
07:01 is not by accident.
07:02 I think they've done a series of steps to make it happen.
07:05 Now, let's come back to this specific question
07:07 about demand creation.
07:11 Now, our sense is that the credit growth for the last three
07:17 years got quite jammed, actually,
07:20 from a growth rate of about 16% or so,
07:23 15% growing in the early 2010s.
07:26 That suddenly come down to 5% or 4%.
07:28 That had a lot to do with the fact
07:31 that there was a lot of NP in the system,
07:34 and banks got stuck with that and focused all the energies
07:38 there.
07:38 And borrowers couldn't borrow because they
07:40 had excess capacity.
07:41 And the whole system, what we call traditionally,
07:43 we call the twin balance sheet problem.
07:45 The twin balance sheet problem got stuck the situation,
07:47 and things got rolled out.
07:49 Things got stuck.
07:50 Now, that was then.
07:52 But as we speak, I'm frankly very bullish
07:56 about the extent of demand that's
07:57 going to come up in the next three years.
07:59 And it is not just a vain comment
08:01 made for an optimistic feel.
08:03 It is driven by certain logics.
08:06 We talk about the fact that the government in this budget
08:09 has talked about investing 14 lakh crores
08:12 in the rural economy.
08:14 We're talking of 6,20,000 crores in the infrastructure.
08:19 We're talking of some 4 lakh crores, if I'm not mistaken,
08:22 for investment in railways.
08:23 End of the day, if that's the kind of demand government
08:26 is-- amount money is spending, it
08:27 is reaching some contractor's hands.
08:29 The contractor is spending it somewhere.
08:30 And that money is reaching somewhere in the ecosystem.
08:33 And I can tell you, I was speaking
08:35 to the promoter of Polycap.
08:37 And these are the people who make wires and cables,
08:39 and they distribute it all over the country.
08:41 I was asking him, tell me real.
08:43 Forget all the talk about whether an economy is really
08:46 doing well or not.
08:46 Forget all the macro numbers.
08:48 You tell me, are you feeling the impact?
08:51 He said, you'll be surprised how much demand
08:53 is coming from Bihar.
08:55 He says, it'll shock you.
08:57 He said, the amount of electricity pipes and cables
08:59 that they're asking is phenomenal.
09:01 He said, UP, of late, has--
09:04 are placing huge orders.
09:06 He said now that he's just supplying cables.
09:09 And he says that his demand is going to go by 15% this year,
09:12 and his turnover is going to increase.
09:14 It's an unlisted company, but his turnover
09:16 is increasing from 5,000 crores to 6,200 crores this year.
09:18 So when I see such anecdotal conversation,
09:21 and I connect the dots with the fact
09:23 that the government is spending the 6 lakh
09:25 crores and the 14 lakh crores, I feel
09:27 that money has to reach someone, and someone has to buy.
09:31 Now, therefore, I would not be surprised at all
09:33 that the credit growth has been straightening at about 5%,
09:36 6%, going up to 10%, 12% a year, going up to 14% a year
09:40 after that, and pulling back.
09:41 I see it happening.
09:44 Mr. Mahobana, you are heading one
09:46 of the country's biggest asset reconstruction companies.
09:50 And you have clearly seen that, from an ARC perspective,
09:53 there's a lot of business to do.
09:54 But is it really, with the government bringing
09:58 in the bankruptcy court, is it really
10:00 helping you resolve the issues and really make money
10:03 out of the ARC business?
10:06 Yeah, I think it is.
10:09 Clearly, life before the court and life after the court
10:14 are like winter and summer, that apart.
10:22 A, defined, time-bound decision making
10:29 within a forum, which you can't stay out of,
10:36 is going to force the way for resolution,
10:38 or otherwise, for many corporate cases, for example.
10:46 And that will allow participation
10:51 by investors, both local and global,
10:54 to come in and lift the companies and the performances
11:01 higher up, so that they can then be in a position
11:04 to start servicing debt and capital.
11:08 So I think there's a sea of change.
11:10 There's a sea of opportunities.
11:13 In fact, I fear there won't be enough capital,
11:18 because given just the size of the NPAs
11:22 that are in the system today, but at least
11:26 on some of the larger cases, the more meatier cases,
11:32 we would imagine in the next 18 months, most of them
11:35 would have been dealt with.
11:39 You can't-- what they were saying about the government's
11:42 ambitious plans to invest that kind of sum
11:44 both in rural and in infrastructures.
11:47 But like you said, there is definitely an issue of capital.
11:51 So where does the government really
11:52 go and raise the money from?
11:54 And if whatever the capital is left,
12:00 if you have this whole issue of-- like Mr. Bhavan was saying
12:03 that you cannot resolve the NPA issues,
12:06 because it's in huge numbers.
12:08 So where does that leave the government?
12:10 First, it has to raise the money that it wants.
12:12 And rest, there are a lot of issues that needs to be resolved
12:16 and where it needs to give the capital to the--
12:18 OK, so let's look at capital in two forms.
12:20 The first capital is that you need for the PSU banks.
12:23 So the PSU banks are going to be left with a gaping hole
12:26 once the recent changes of the RBI guidelines
12:30 flow through the PNL and the balance sheet.
12:33 So how do you plug that hole?
12:36 And that, out of that 2.11 trillion,
12:40 2,111,000 crores of recapitalization
12:42 announced in late October, 1,35--
12:45 so 1.35 trillion was the recap bonds,
12:48 which have actually had no impact on the FISC.
12:50 So under fiscal accounting rules,
12:53 because it was a sort of a cashless kind of transaction.
12:56 So if they need to, they can find another 2 trillion rupees
12:59 there.
13:00 So the question is, how do you do it?
13:05 I mean, how do you--
13:07 six months after the last recap, how do you go and tell
13:11 or decide that, OK, yeah, another 2 trillion
13:13 is going to do the trick?
13:14 And so this could actually be a prolonged process.
13:17 And every month, every week that you lose is a delay.
13:20 The second issue is on the other spending that they're doing.
13:25 And like, say, for example, railways.
13:28 So the government is increasingly
13:31 relying on extra budgetary support, right?
13:34 So like, railways is raising its own funding.
13:38 NHAI does its own.
13:39 Even rural housing, there is a meaningful amount
13:41 that comes from NABARD.
13:42 So there are other extra budgetary sources
13:45 that the government is tapping.
13:47 Is the government crowding out?
13:48 I mean, as I said, the aggregate fiscal level--
13:53 so state plus center.
13:54 See, the state government spend 90% more than the center.
13:58 So it is wrong to just look at the central government
14:00 and say, look, things aren't changing.
14:04 Aggregate government borrowing as a percentage
14:07 of incremental deposits is coming down.
14:11 It's not going up.
14:11 So there is more money left for the private sector.
14:14 So that's one.
14:15 Second issue is that financial savings as a percentage of GDP
14:20 are going up.
14:21 So this is an example I've used often.
14:24 So apologies if you've heard this before.
14:27 Half the economy is a net consumer of food,
14:30 which is the top half.
14:31 Half the economy is a net producer of food.
14:34 If food price growth is high, there
14:36 is more being transferred from the consumer to the producer.
14:40 If that does not happen, there is almost 1 and 1/2
14:42 billion crores of the transfer that does not happen,
14:46 which is what the change is right now.
14:49 And so which is why the bottom half is struggling to consume.
14:53 The top half is actually seeing higher consumption and also
14:57 higher financial savings.
14:58 For most people in the room, if you get 10%, 15%, 20% more,
15:02 your savings will go up.
15:03 Whereas the bottom half, if you give 20% more,
15:06 they'll consume more.
15:07 So financial savings are going up as well.
15:10 So there's no dearth of capital.
15:12 It is the ability to spend which is a challenge.
15:16 But we are also seeing that financial savings,
15:19 household savings as a percentage of disposable income
15:22 is also going down.
15:23 So when you're saying that the financial savings is also
15:25 going up, there is an increase in the aggregate savings
15:29 is also going up.
15:30 Yeah, so we can discuss where you got the data from.
15:32 Because I'm talking about RBI data as of last year.
15:34 And if you see inflows into mutual funds,
15:37 if you see deposit growth, and there's
15:39 no reason to expect that FY18 would be any different.
15:41 Financial savings are going up.
15:43 There's no debate on that.
15:45 Vaidya, what's your take on this?
15:48 You said that already the government's capex
15:51 is the highest compared to the private sector.
15:55 And here you're talking of still more 1 trillion
15:58 getting into railways and all those kind of stuff,
16:01 ports, infrastructure.
16:03 So with a stretched balance sheet,
16:06 do you really think the government can achieve?
16:08 And it has kept an ambitious target of $1 lakh
16:12 in divestments.
16:13 So do you really see all that getting done in the next one
16:17 year or so?
16:19 It's actually a good question.
16:21 And it's a fair question to ask, because people
16:23 are asking this question.
16:25 Whether you will really have the resources
16:27 to make this kind of investment, the $14 lakh,
16:29 plus the $6 lakh, plus the $4 lakh,
16:31 where's the resources for these?
16:33 And actually, there are two things here.
16:36 One is the resources.
16:38 One is the will and the ability to really translate
16:44 those monies into action, even if you did.
16:48 If you noticed, many years at a stretch, budgets were announced.
16:52 But a lot of the investments were left unspent.
16:56 And the department simply surrendered the monies back
16:59 at the end of the year.
17:00 Now, I take a lot of inspiration from the fact
17:03 that the road construction has gone up, the kind of numbers,
17:06 you know, it's crazy, kind of roads, investment roads
17:08 happening.
17:09 People are really giving us feedback
17:11 that road construction is for real.
17:13 Again, a micro-entrepreneur story,
17:16 that there are a lot of entrepreneurs who purchase
17:18 those road building equipments, who come to us for financing,
17:21 or even ask for financing for secondhand of them.
17:24 We say, why?
17:24 They say, oh, the road construction has come.
17:26 So their ability to convert those theories into real,
17:28 real-- I can say road construction is real,
17:31 train construction is real.
17:32 So ability, I think we should accept it's there.
17:35 Now, with regard to funding, I think the big assumption here
17:41 is the growth rate of-- I don't know if the budget is estimated
17:44 that at 7.5% or something like that.
17:47 So the big assumption is that.
17:49 We have to hope that happens.
17:51 Maybe the policy makers, the government
17:52 have that much more of a better view of the economy
17:56 and get the feeling.
17:57 So reasonably can be believed.
18:00 But the biggest play here is the GST.
18:03 Because it is quite clear that even
18:05 after implementation of GST, a lot of taxes
18:07 are still leaking because there's
18:11 no matching of the bills.
18:12 And from April 1, after GST comes through,
18:18 it is expected to give a significant shot in the arm
18:21 to raise those resources.
18:23 I was asking the same conversation of someone,
18:25 a very established fund manager by the name of Sanjoy Bhattacharya.
18:29 And I asked him, look, Sanjoy, do you
18:31 think this kind of fiscal deficit numbers of 3.5%
18:34 this year will get met?
18:35 Because investment is already announced.
18:39 Resources, does it feel stretched?
18:42 He said, look, listen, Vaidya, this Jaitley is too smart.
18:46 And he will figure it out to get the funds.
18:49 And he must have a plan in mind that the GST will work.
18:52 So I'm kind of inclined to the thought
18:54 that when the e-way bill matches comes through,
18:56 we're expecting a significant uplift in GST collections.
19:01 Informal talk with many of the entrepreneurs we finance
19:04 is that once the e-way bill comes,
19:06 there is no escape from paying tax.
19:08 So that's a big count.
19:11 Ninkant, what's your reading of the GST leakages?
19:15 I mean, the leakages that they are going to stop,
19:18 and that will really increase collections.
19:21 I mean, that's a big bet that the government is thinking.
19:24 I think that the government is being too conservative
19:27 in its GST estimates.
19:30 The collections this year are well ahead of what you
19:34 would call revenue neutrality.
19:36 So when the budgets for FY18 were presented
19:39 by state and central governments,
19:42 no one expected GST to happen.
19:43 And it was not part of the budgeting process.
19:47 If you see the full year assumptions under taxes
19:51 that have been subsumed by GST, they,
19:55 for the center and states put together,
19:56 would add up to about 10.6 trillion rupees.
19:59 So 10,60,000 crores.
20:02 If you see the run rate in the first seven months,
20:04 till January, the data came out last night,
20:08 we are actually running ahead of that rate.
20:10 And this is the first reported.
20:11 And not to confuse you further, but what happens
20:15 is yesterday the government reported 86,300 crores
20:20 for the month of January.
20:22 And this was for companies that met their deadline.
20:25 There are companies that file after the deadline as well.
20:28 And the government does not go and revise those numbers.
20:31 What we have observed is that in any given month,
20:35 the cash take, the cash that the government gets,
20:37 is substantially higher than what
20:40 the first reported numbers are.
20:42 So even the first reported numbers
20:44 are actually at or above revenue neutrality.
20:48 If you see the numbers in terms of cash collected,
20:55 they're actually substantially higher.
20:56 So the government, and I think for next year,
21:00 given the lack of a trend line to work with,
21:04 the government has been very conservative in its estimates
21:06 on GST.
21:07 They pretty much-- this year we had eight months of GST.
21:09 They've done it into 1.5 and plus nominal GDP growth.
21:14 That's what next year's GST number is.
21:17 And I think it will be higher than that.
21:19 Because GST applies on indirect-- is a revenue number.
21:24 It's on revenues.
21:25 Big contributors to indirect taxes
21:27 are petrochemicals, metals, cement, automotive.
21:31 In every single segment, the nominal growth
21:35 is well into double digits, if not mid-20s.
21:38 Because price itself is up 20% of petrochemicals.
21:41 Metals, it's up meaningfully.
21:42 I think it will keep going up.
21:44 And volume growth, even if it's 4%, 5%, which is low.
21:47 So I think on the tax side, the government
21:49 is actually undershooting on its estimates.
21:53 I think they'll get far more tax in FY19.
21:56 Frankly, when I talked about what Sanjay said,
21:58 and now I'm hearing what Neil Kant is saying.
22:00 When I'm hearing renowned economists like these people
22:03 saying, look, this tax is under-budgeted.
22:05 In fact, we'll get more.
22:06 I actually get a lot of confidence and, let me say,
22:10 inspiration that this year is going to be a big year,
22:12 but they will pull it off.
22:13 I hope you're right, Neil Kant.
22:15 Mr. Gokulam, the net profits for mostly large Indian banks
22:23 have been completely slumped.
22:25 It's nearly halved from what it was like three years back.
22:28 It was like some 91,000 crore.
22:30 Now it has come down to 43,000.
22:32 And the RBS recent stress test has
22:35 shown that if close to 20 banks will fall short
22:39 of the capital adequacy of 9% if the NPA
22:43 gross NPA gross is 16%.
22:46 So do you see the government pushing for consolidation
22:51 in this kind of scenario?
22:54 It's hard for me to say.
22:56 That is the stated intent of the government.
23:00 It is widely acknowledged that we have too many small banks
23:06 which don't have any particular space or a niche
23:10 that they wish to sort of operate in.
23:13 So I think to begin with, it would probably
23:17 look at getting some banks into the retail side, some others
23:23 onto the wholesale banking side, or perhaps even
23:28 at regional level sort of consolidation of some banks.
23:31 But would all of that make sense?
23:35 I'm not too sure.
23:36 Because frankly, if you are not of a certain size today
23:42 and you want to play in every soccer field,
23:47 you're bound to get injured.
23:49 So I think they'll have to take it a few steps at a time.
23:54 Privatization, though not immediately on the agenda,
24:01 I think is a foregone conclusion.
24:03 Now, how long it takes, whether it's
24:05 another term of the government or beyond that, one can't say.
24:09 But I think that's the way it will eventually play out.
24:16 And in terms of negotiations, where
24:19 we are talking of ARCs having this huge pile of loans
24:22 to feast upon, but there's this whole unwillingness
24:26 of the bankers to take a haircut.
24:28 So while it says that this is a good time for ARCs
24:32 to do business, but actually the deal making
24:35 is not really happening at the pace that you would want to.
24:38 So what is your own--
24:40 Well, I think again, that's in the past now.
24:42 Because frankly, when it comes to the action
24:46 under the IBC in NCLTs, banks will
24:50 have to choose between options that are thrown to them.
24:52 And the best option is perhaps what they
24:55 will have to pick and run with.
24:58 They won't be able to say, we would prefer something else.
25:00 Because the investors would come with a particular offer,
25:05 a best offer on the table.
25:07 And they'll have a finite time to live with it
25:10 or suffer the consequences of a liquidation
25:14 scenario on the other side.
25:17 So in a sense, it's a blessing, because this
25:20 is forcing the decisions, something
25:22 which the bankers might have known all along,
25:25 but were reluctant to accept widely
25:28 for fear of whatever consequence.
25:31 But here in an organized manner under the so-called blessings
25:38 of a court, a best transparent sort of offer
25:43 is considered and accepted.
25:46 Then you have to move on.
25:48 Do you see the system actually geared
25:49 to handle this kind of cases?
25:51 Look--
25:52 I mean, we are already having-- you're talking of--
25:54 No, I think we are not today, just
25:57 in terms of infrastructure, in terms of capital,
26:00 in terms of number of professionals required in it.
26:03 And it's because here we are doing and dealing
26:08 with the stock position, which has accumulated
26:11 over the last 10 years.
26:13 If it was a flow, I think the system
26:15 would have been able to handle it.
26:16 So let's acknowledge that.
26:17 And on top of that, we got cases from BIFA,
26:21 which were running in the thousands as well.
26:24 So there's a huge load on the system.
26:28 And the approach of the government and the Reserve Bank,
26:32 I think, has been good, because they've
26:34 started with the bigger accounts.
26:37 The big businesses support a lot of smaller businesses.
26:39 So if you fix the bigger problem,
26:41 hopefully the smaller problems will also
26:43 get auto-fixed along the way.
26:45 So the start is good.
26:47 And in spite of all skepticism and some fear,
26:54 it's trending all right.
26:55 We're coming close to seeing some resolution
26:59 in the big accounts over the next few weeks.
27:02 We may still-- maybe another year
27:05 in terms of challenges and legalese that might go on.
27:10 But I think the system is going to settle down fairly quickly.
27:14 And you'll see much faster churn of capital.
27:18 We're discussing this in the context of elections,
27:20 saying that, look, what happens to reforms
27:22 in the context of one year forward,
27:24 and elections around the corner?
27:27 The way I look at this or observe,
27:29 I feel this government has done the big tickets out
27:33 of the way a year and a half before the elections.
27:35 I think they have been definitely mindful of it.
27:37 So demonetization in 2016, knowing fully
27:40 well that the impact of it will come in 2017.
27:43 Elections 2019, by that time, it's done,
27:46 dusted, buried, over.
27:47 And by 2019, people will have forgotten it,
27:49 and the economy will be bouncing back again.
27:51 When you think of GST, they were very keen to do it.
27:54 Because everyone knows after implementation of GST
27:57 for probably a year or so, there is pain, there is pressure.
27:59 Small entrepreneurs will complain.
28:01 Input tax credit is an issue.
28:03 We know the issues.
28:04 They also know the issues.
28:05 So I think they've again been--
28:07 they've done that early enough so that by the time '18, '19
28:09 comes, things are smiling again and people are OK.
28:13 So I think that all the big ticket items are actually
28:15 behind them.
28:16 At least in the next one year, they are not going to relax,
28:20 I feel, on this oil reform that they've already done.
28:23 And those kind of things are out of the way.
28:25 So I think, therefore, that the big ones are out of the way.
28:28 They'll probably just run an efficient government
28:32 and make all the investments of the 20,
28:35 22 lakh crores they've announced.
28:37 That will make people feel good.
28:39 And that's, frankly, good for the economy
28:40 also, because end of the day, India,
28:43 after four or five years of lying low on the credit growth,
28:47 if it ticks up again, everybody will feel good again.
28:50 I think it's been timed well in such a way
28:52 that in '18, '19, there's no disruption.
28:54 In this year, I'm expecting no new major changes,
28:58 no Benami Act coming, no Aadhaar linked to houses.
29:01 Nothing is coming.
29:02 You can just have a smooth ride as far as the reforms
29:05 are concerned, I think.
29:06 If not reform, smooth ride as far
29:07 as major disruptions of the government is coming,
29:10 I don't think so.
29:11 It will be as smooth as the reforms over the next one
29:16 year, or the growth in the next one year.
29:18 Because you're already seeing on the private side,
29:20 the CAPEX cycle has really come off.
29:22 I mean, we are seeing very high growth rates.
29:25 And we are seeing 49% between FY '05 and '08.
29:30 It has come down to 13% FY '09, '12.
29:32 And we are talking of 4%, which is now.
29:34 So with no visibility in CAPEX, balance sheets
29:38 still being delivered, and capacity utilization still
29:43 not really up there.
29:44 So where do you see the whole trigger coming
29:47 on the private CAPEX side?
29:48 Yeah, so private CAPEX, I would say, is starting to turn around.
29:53 It is very early days.
29:56 But if you see, three years back,
30:00 no one would have thought anyone would set up a steel
30:02 plant again in India.
30:04 But now, already, two large groups,
30:06 the two of the largest companies,
30:07 have announced 5 million tons each of expansion.
30:11 Now, this is very small compared to the point at which,
30:14 at one point, three years back, we
30:16 had 40 million tons of steel capacity being constructed.
30:18 But at least 10 million tons, the announcements
30:20 have been made.
30:22 Telecom, I think there is massive CAPEX happening.
30:25 The 10 times growth in data consumption
30:27 is not coming out of thin air.
30:29 Everyone needs to invest.
30:31 I think there is good investment happening on the metro rail
30:34 side.
30:35 It doesn't affect the state and central government fiscals.
30:38 But it is being funded by JICA, by the European Investment
30:42 Banks.
30:43 They are alternative sources of funding that are being used.
30:45 Very good action there.
30:47 So I think in patches, CAPEX is starting to pick up.
30:51 Transmission CAPEX has been strong all this while.
30:54 Generation CAPEX, I don't think, will pick up for a long time.
30:57 So I think-- but yeah, it's very early days yet.
31:01 Will it really revive the economy?
31:04 I don't think so.
31:05 Will there be more disruptive reforms?
31:07 I mean, I would say that the RBI guidelines that came out
31:09 were-- I think they are very good for the medium term
31:13 health of the economy.
31:14 But they will have some cost of growth in the next 12 months,
31:20 as the banks struggle to digest it.
31:22 So will this CAPEX kind of-- is it still--
31:27 is it kind of people have committed to it,
31:29 or they are still waiting for then elections
31:31 to kind of play out?
31:33 I don't think it's about elections at all.
31:34 I mean, you know, if India's steel demand is now
31:36 105 million tons, and it's growing at 4% to 5%,
31:39 let's not forget.
31:40 I mean, 6.5%, 7% is below what we should be doing.
31:43 But 6.5%, 7% is very strong growth.
31:46 And if it drives 4% steel demand growth or 5% steel demand
31:49 growth, you need one and a half furnaces every year.
31:53 One furnace, you know, a modern furnace
31:55 can give you 3 million tons.
31:57 You need one and a half furnaces every year.
31:58 Where are they?
31:59 So now we have reached a point where
32:02 we need to start investing in steel.
32:04 I mean, there are other sectors where it is needed as well.
32:07 Like in airlines, airports.
32:09 You fly from Mumbai to Delhi, you
32:11 spend as much time on the tarmac and in the air
32:13 than it takes to fly from Mumbai to Delhi,
32:15 because there's a congestion on runways,
32:17 the congestion of terminal capacity.
32:19 Capex needs to start.
32:20 But again, on the steel side, it is largely
32:22 because the government kind of closed the doors
32:24 on Chinese imports, and it created that artificial--
32:27 Not really.
32:27 Not really.
32:28 --and suddenly started looking good for the steel industry.
32:31 Not really.
32:32 So you're right that it was the import decline which helped.
32:36 But that happened because Chinese exports collapsed.
32:39 So right now, India is a net exporter.
32:42 So the import barriers are likely not non-existent,
32:44 not needed.
32:45 But what has happened, you're absolutely right,
32:47 is that Chinese exports have collapsed.
32:49 And that has given an opportunity.
32:51 But you take it as it comes.
32:53 I mean, the point is that you need more steel capacity.
32:57 So how are your investors looking at the next one year?
33:01 Is there too much talk around elections?
33:04 Yes, I think that is--
33:05 Is there money sitting on the sidelines waiting to come?
33:08 Money never sits on sidelines.
33:11 So people-- I mean, there are very few people
33:13 who have the discretion to hold 15% of their or 20%
33:17 of their funds in cash.
33:19 Everyone has explicit limits, 5% at max,
33:22 and the rest has to be deployed.
33:24 So if they get inflows, they will deploy.
33:27 If they get redemptions, they will sell off.
33:29 So they are also agents.
33:31 They're not principals, really.
33:33 And so are people waiting for more clarity on elections?
33:42 I think many of the teams in India are multi-year,
33:46 structural.
33:47 I don't think an election can really change
33:49 those trends very quickly.
33:51 So I don't think it is really standing on the sidelines.
33:55 I think people would rather wait for clarity
33:57 on why have bond deals gone up, when will they come down?
34:01 Because they show some stress.
34:04 They're also worried about currency.
34:06 I think there is some concern emerging on the currency,
34:08 because trade deficit has widened very sharply.
34:11 And there is some political uncertainty.
34:14 We'll take one last, since all the time is up.
34:17 What are the key risks that you see to the government
34:21 achieving the stated 7%, 7.5% growth
34:24 that we are talking about?
34:25 If everyone could just--
34:27 I'd say it's external.
34:29 If oil prices went crazy, for example,
34:32 then certainly it has an impact on even currency.
34:37 And therefore, your fiscal deficit
34:39 can be a bit of a bother.
34:42 And then current account deficit gets affected,
34:44 and inflation goes up, interest rate goes up.
34:46 You know, those kind of cyclical issues can happen.
34:49 But that's got nothing to do with elections
34:51 around the corner.
34:52 It's just a macro risk.
34:53 But that's a macro risk.
34:54 Any time, any year, for the next 20 years,
34:56 the risk will always be there, as long as India doesn't become
35:01 a net exporter of oil, rather than being an importer.
35:04 So that's sort of macro.
35:06 But really, anybody who looks at India,
35:08 like an investor, anybody who looks at two years, three years,
35:10 five years, point to point, and ignores these things,
35:13 shouldn't really bother.
35:14 But risk, specifically, I'd say oil.
35:18 And Neelkanth is very, of course, confident about GST.
35:22 I am hopeful as well, based on anecdotal data,
35:26 whether the GST numbers are going
35:27 to be so strong enough to fund this sort of an infrastructure
35:31 financing.
35:31 So that's a bit of a niggle.
35:34 Oil is a bigger animal.
35:36 Mr. Bhagwan, what's your take?
35:38 I don't have anything more to say,
35:40 except I believe there will be some negative fallout
35:44 of the lack of winter rain.
35:47 And I hope, at least, the summer rains are going to be good.
35:51 Because that's going to set the mood, do a lot of things
35:55 as well.
35:56 That would be one area.
35:58 The other would be prospects, if at all,
36:02 of hardening interest rates, just depending on the macros.
36:06 We also end up with very strange situations.
36:11 So if interest rates were to remain stable and maybe
36:15 a little more benign, I think we'd be on a strong footing.
36:18 And if you're meaning risks induced by the government,
36:21 like the demonetization of GST, et cetera, forget it.
36:24 It is election year.
36:26 And if I was running a government
36:28 and I had election coming one year from now,
36:30 I would actually say it's time to show results and focus
36:35 on results.
36:35 I don't think I'm going to do any extraordinary bravado.
36:38 And I think that's how the government would probably
36:39 think.
36:40 Neelkanth, last view from your side.
36:43 What happens if there is a nasty surprise in the election?
36:49 In the next election?
36:50 Next election.
36:53 So I don't think much will happen.
36:56 Because if you're thinking about the markets,
37:00 more than half of NIFTY revenues come from outside India.
37:04 NIFTY and oil are actually positively correlated.
37:07 So if global growth is OK, I think the equity market
37:10 should be OK.
37:12 They may not be roaring, but they will be OK.
37:16 So you don't see a crash like the way
37:18 we did see on the Gujarat election day?
37:22 That was-- see, because so many things happen globally,
37:26 we confound them.
37:27 We all look in our well and see, oh, yeah,
37:30 this is why it happened.
37:31 But there are global changes happening as well.
37:33 I don't see-- I mean, that's a year away,
37:35 but maybe less than a year away.
37:37 But the point is that volatility for a week or two
37:45 is not really a trend.
37:46 I mean, if you see 2004 as well, there
37:49 was some panic in the market.
37:50 But then the economic momentum takes it through.
37:53 So largely, the confidence will stay,
37:54 irrespective of which way the world goes.
37:56 I think the changes are structural.
37:58 I mean, I continue to believe state governments matter
38:00 a lot more.
38:02 There's no change happening there.
38:03 There are good reforms happening in UP,
38:05 and there are changes happening in Maharashtra,
38:07 in Gujarat, and it's everywhere.
38:09 Thank you, gentlemen, for taking time out
38:10 and sharing your perspectives.
38:11 Thank you.
38:12 Thank you very much.
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