Before the end of this month, the new government that should assume charge will come with a reasonable burden of expectations. With no time to lose, it will clearly have to open up the new innings in an explosive style, opines Nilesh Shah, Managing Director and Chief Executive Officer of Axis Capital
A thumb rule which will work well in estimating the market sentiment about the parliamentary election results is Sensex/100 which should equal the number of seats required by the majority party. In other words, if a single party gets say 270 seats then Sensex could move towards the 27,000 mark.
In the last two years, the economy grew below 5 per cent per annum. The vicious cycle of lower growth — lower employment — lower savings — lower investment — lower growth is being played out.
I will recommend the new government to focus on the following points to break that cycle and revive growth.
Today Indian real estate sector is at a stage where it has created many billionaires in the form of real estate developers and many millionaires in the form of real estate investors. However there are severe side effects in the form of high cost of real estate, inefficient allocation of capital and lack of housing access to a large part of the population. High real estate prices are also impacting entrepreneurship. The high cost of real estate today is driven by longer executional cycle, corrupt practices, lack of accountability to buyers, high cost of land and high cost of capital due to the risk perception. Today’s real estate sector looks like the telecom sector of the past. High cost, lack of availability and poor services. Bringing a regulator which can take away the discretionary power in approvals, balance the field in favour of buyers, lower the risk perception and attract capital to increase throughput will make a huge difference to real estate sector and help grow the economy.
Mining ban on iron ore, coal and sand has adversely impacted growth. It has resulted into unaffordable imports, loss of employment, higher NPAs and stress and blockage of precious capital. A suitable policy (no discretion in decision making) for allocation and operation of natural resources will jump start growth.
Cost of Capital
A fairly large segment of the economy pays exorbitant cost of capital. Even in urban centres it is common to find a small vendor, SME entrepreneur, auto driver etc. paying an exorbitant rate of interest. Availability of reasonably priced credit through formal banks and NBFC or informal MFIs and credit societies channel will reduce rent seeking in the economy, lower inflation and bring forth entrepreneurship.
Construction and textiles are the two largest employment generating sectors. Investment in these two sectors has the highest multiplier effect on the economy. Textile Upgradation Fund (TUF) had a positive impact on increasing India’s share in global textiles
market and support employment. The Golden Quadrilateral project had a multiplier effect on growth. We came to know how to build 20 km of quality road a day a few years back. A focussed approach on textiles and construction sector (not just announcement of grants or concessional financing but actual execution on the ground) will support growth.
Availability of Risk Capital
Many things have constrained investment and growth. One of the factors is availability of finance and risk capital. In FY 14, three IPOs raised a paltry sum of `1,200 crore, less than the dividend paid by many companies. Lack of equity capital has forced investment to be
funded out of debt. Delay in project execution has made many projects unviable due to capitalisation of interest and non availability of additional finance. The culture of providing risk capital to the entrepreneurs needs to be brought back. There has been a significant decline in financial savings over the years which have reduced the overall availability of finance for entrepreneurs. Lack of equity and lack of finance has adversely impacted investment and growth. Incentive paid for distribution of financial products is very low. A suitable encouragement to financial intermediation will solve the issue of shift to financial savings and provision of risk capital.
Over valuation of the Rupee in the last few years converted many of the manufacturers to traders as import was cheaper than local make. We also have inverted duty structures across many industries where importing raw material is expensive than importing finished products. We need to reverse that immediately to encourage local manufacturing. Mean reversion in the Rupee has created an opening for local manufacturing to get its mojo back. It needs to be supported and encouraged through productivity enhancement. An open interaction with stake holders will bring about many issues which can be resolved through administrative mechanism rather than change of law.
Holding Company for PSUs
Capital invested in PSUs does not generate adequate return as they try to achieve multiple objectives from social service to financial inclusion. We have seen marginalisation of PSUs across sectors like telecom, airlines, banking, refinery, consumer products etc. Most of the time, talent which moved from PSU sector to the private sector has led that marginalisation. Multiplicity of objectives, lack of administrative freedom to take appropriate decisions at right time has resulted in lower return on capital. A holding company structure (away from ministry/departmental accountability) for PSUs with clear objectives will give necessary freedom to generate better return and support growth.
Infrastructure constraints are visible across the economy. The government does not have adequate resources to build infrastructure. Private sector does not have risk appetite to build infrastructure. PPP model in greenfield infrastructure projects is not bringing desired results as executional delays on ground have adversely impacted return profile. It will be worth putting running projects (like the local train network of Mumbai) in PPP format so that private sector can enhance the efficiency and don’t have to battle with uncertainty. Capital freed from such reverse BOT model can be put into greenfield infrastructure project (like Metro train projects) by the government. Such innovative structuring can enhance productivity, improve customer experience and return on capital employed as well as free up capital for new infrastructure projects. Growth will get supported not only by the improved productivity on existing assets but also by creation of new infrastructure.
The most open secret about India is that we are a net exporter of capital. A poor country like India is net exporter of capital in various forms. By importing gold, by buying out companies overseas, by sending kids abroad for studies, by shooting movies on locations abroad, by touring countries abroad, by buying defence equipments from abroad is export of capital. Some of this activity like gold import is absolute waste of precious capital whereas others like study and tourism is inefficient use of precious capital. We need to stop wasteful capital outflow by encouraging local capital to stay and work in India. We need to encourage technology and productivity enhancing investments. We need to give preferential access of vast local markets to those foreign investors who are willing to provide technology, help enhance productivity, create multiplier growth effect in economy and make India a regional hub for exports. While tax demands and IPR regulations have vitiated FDI sentiments, we need to market long term track record of listed MNC subsidiaries in India outperforming their parents by miles on a currency adjusted basis across sectors and across time periods to
attract long term partners.
Marketing of India
Global markets have created a unique opportunity for India. Majority of our peers are on the left side of global investors. China is facing credit bubble. Russia is facing international sanctions. Brazil is plagued with macro issues. India along with few other countries like Mexico is on the right side of global investors. We need to market India correctly to portfolio investors to garner as much equity capital as possible.
There are many things which can be done to revive growth. Miracle may not happen overnight but well begun is half done. We should follow the Nigeria example. Nigeria recently increased its GDP by a hopping 89 per cent to become the largest economy in Africa by accounting its hitherto unaccounted parts of economy. Surely Indians are the founders of the college where Nigerians have learnt such tricks. Imagine the jump in GDP, reduction in deficit ratio and improvement in credit ratings if we can account for the parallel economy in our mainstream economy