India’s biggest challenge is to find the capital to fund its economic growth: DBS

Singapore: Piyush Gupta, chief executive officer of Singapore-based DBS Group Holdings Ltd, says India’s biggest challenge is to find the capital to fund its economic growth at a time when the capacity of the banking system to extend credit is constrained by a pile of bad loans.

In an interview, Gupta also stressed the importance of a second term for Reserve Bank of India (RBI) governor Raghuram Rajan.

“There is no question—apart from the stuff that the government has done, if there is one person who is responsible for changing the narrative on India, it is Rajan. Not having Rajan continue is going to have material impact on the perception of India overseas—there is no question in my mind,” Gupta said.

Edited excerpts:

There are not many emerging markets to feel fairly sanguine about currently. Is India one of them?

I am very positive on India. And, it is not just for the reasons people give—that India is de-linked from China and that the country is showing good growth. India has seen the trough. India is currently at the bottom of a curve that is going to take off and pick up for the next 3-5 years. Timing is relatively positive. A good monsoon will help, and you will get a consumption pick-up if that happens. Cyclically, some of the government spending is beginning to come through. Structurally, you are beginning to see a turnaround. When I talk to some of my clients in India, including some of the naysayers, in the last six months, I am beginning to sense more optimism and confidence than I’ve seen in the last two years. Even with people who are not fans of the (Narendra) Modi-led government, I am beginning to hear more confidence.

Against the backdrop, how much is it a concern for investors, and how much does it impact India’s growth in general, that its banks are weighed down by souring corporate debts?

If you ask me, this is the single impediment to India’s growth—there are two parts to it—people talk about the supply side, which is infrastructure—and the capacity of the banking system to provide the credit is constrained. This is the single biggest challenge that India has—how does it get enough capital for growth? If you look at what other countries have done—China generated its own savings through trade surpluses, or other countries let a lot of foreign capital come in, and they leveraged foreign capital to drive some of the stuff. In India’s case, since the country does not have the fiscal capacity to be able to do a lot of the investments, we’ve got to be a lot bolder, and let foreign capital participate. RBI has just announced new rules on ownership in private sector banks—so, Rajan, with this move, is saying that he needs to take this step as Indian banks don’t have enough capital. Rajan’s message is that if we open this up, then we may be able to get a lot foreign capital. That is exactly my point. For my money, I recognize the political considerations, but the P.J. Nayak report which said government stakes in public banks must be diluted to 40% was also a very smart move. Look at Singapore, the government has only 29% of DBS. They don’t control me. But Singapore’s Central Bank controls every bank, they control the banking system.

I think the big challenge for India will be for capital—whether it is opening up securitization programmes, opening up more access to international capital coming in, whether it is capital in the banks, long-term infrastructure bonds—all of these are going to be required. Unfortunately, we are caught in a split—on one hand, India is a darling of the markets right now and there is appetite for people to put money into the country. If you’ve got to put the money to work somewhere, India seems to be the good story.

I think that we need to make sure that there are some areas where PR (public relations) are important. Look at the whole retrospective tax issue, whether it is Vodafone (Group Plc.) or any other company—it does matter in terms of investors’ psychology. So India has to recognize that if foreign capital is a big driver of its needs, then it has to seen to be friendly to foreign capital.

Yes, in many ways, India seems to be having a perception problem. If you see the underlying issues, how important are they from financial economic standpoint? Many of these are not that important. But they become big issues. To me, the real issue is how do you recognize that perception is important? Once you recognize that perception is important, then how do you bend a little bit more backward just to safeguard that perception. If the economic cost of managing that perception is not that big, it is a worthwhile tradeoff. Problem is that in India, we don’t recognize that it might be a worthwhile tradeoff. We often get stuck on principle—it is true and the principle may be right, but it is also worthwhile to check what you are giving up for that principle? Look at (late Singapore leader) Lee Kuan Yew—the biggest trait was being pragmatic. Pragmatism has got its virtues. Pragmatism realizes that we cannot always be principle-led. It does not matter to me—the colour of the cat—as long as the cat catches the mouse. The sense of how you take a little more pragmatic view, and recognizing that pragmatism is important if our biggest impediment to growth is going to be capital; perception is important to capital. People joke about Modi’s travels, but the prime minister has done an extraordinary job in the last 18 months—the reality is that he took India up a different notch in terms of an FDI (foreign destination). I think frankly, Modi’s focus on saying we need foreign capital is worth making the effort, and is the right focus—we just need to make the rest of the system and the bureaucracy recognize that perception is important.

How do you see two years of the Modi government?

I am still very positive. This is not a political statement, nor am I saying this because I am a big fan of the BJP (Bharatiya Janata Party). I am apolitical. But if you look at some of the things the Modi government has achieved, some of it is under-appreciated. Half of India’s problems is legislative—the other half of it is in administration and execution. On the administration and execution fronts, some of the changes have long-term consequences. Take a few of them. The concept of fiscal devolution to the states—giving them more revenue resources and letting them get on to do something has important long-term consequences. I think transparency in resource allocation—the e-auction system—has important long-term consequences. Enough people come and tell you that at the top level, corruption is disappearing in India—this has important long-term consequences. DBT (direct benefit transfer) has tremendous long-term consequences. Look at the $70-80 billion that we are losing in subsidy leakages. They had addressed kerosene—if by the end of the year, they can do more direct transfers, and even if you save half of the amount that goes into leakages, it is still $35 billion—this has long-term positive consequences. Many of the ways of working are ripe for change in India—the Modi government has been addressing this.

Anecdotally, let me give you two examples. Singapore’s PSA International is working on the Jawaharlal Nehru Port in India, and its CEO told me that they were running four months ahead of time on dredging and contract—he told me that he was shocked because the general thing about India is that you will be running three years behind schedule. Singapore’s Surbana Jurong is doing the masterplan for Amaravati (the proposed new capital of Andhra Pradesh), and they told me…the blue print got ready and was approved ahead of time. Two specific projects that Singaporeans are running in India, they are surprised that things are happening ahead of time. So that administrative execution thing that has changed in India is being under-appreciated.

On the legislative agenda, people are hung up on land, labour and tax code that did not happen. Yes, GST (good and services tax) can be a game changer. But within this, they have given land and labour to the states to run with—this is not a bad thing. Even if 7-8 states in India go ahead and do something, that is 400 million people and a trillion dollar to GDP (gross domestic product). From a perception standpoint, the RSS (Rashtriya Swayamsevak Sangh, the spiritual parent of the ruling BJP) or the Hindutva, continues from time to time and makes the wrong noise. Unfortunately, this clouds the perception. I think they need to do a better job on dialing up the positivity of what they’ve already achieved. The international media focuses entirely on three pieces of legislation, saying that India has not been able to pass land reforms, labour reforms and bring in GST—but you have to change the narrative. You’ve got to let people recognize what are the things that have happened and the positive consequences of that. The country could do with a better PR (public relations) job.

How important is it for India, and for global investors that Raghuram Rajan gets a second term?

Very important. There is no question—apart from the stuff that the government has done, if there is one person who is responsible for changing the narrative on India, it is Rajan. Not having Rajan continue is going to have material impact on the perception of India overseas—there is no question in my mind. Most countries in the world advocate the independence of the central bank. I think it is a split camp on Rajan—I don’t know the inside politics—some people in the cabinet are not very happy with Rajan, but there are others who recognize that he brings a lot of value. The fact is that he is a sound economist. The fact also is that some of the disciplines that he has established have long-term positive consequence for the country.

Has RBI under Rajan been successful in its efforts to create a more diverse banking sector and taking banking to the masses.

It is not entirely clear to me what the future holds of the world of banking. Think about a base case—it is not clear to me why India needs more banks. For a size of the country of India, we need consolidation of banks—the current banks are not big enough. The banks in China are 50 times in size when compared to India. Look at the top banks globally—SBI is ranked around 60, and that is my (DBS) size. If you really ask me, you need bigger scale and size in traditional banking. The other issue is that Internet and technology is dislocating all previous business models. I think it is true that you could have complete democratization and multiple small players could actually help—I think small bank licences are actually quite positive. The payment banks licences—I am less convinced. If you think about the total banking sector wallet, payments are a very small part. Even today, about 70-80% of the banking system revenues are balance sheet revenues—they come from deposits and loans. Now you are left with 20%. The pure payments revenue pool is not very large. You are building a business case around what I think is a relatively small value pool in the first case—the nature of technology means that value pool is shrinking—whatever you could charge for payments in the past, even that you can’t charge. So the revenue model is very hard to define. Financial inclusion is helpful—but if you are Airtel or Vodafone, you have 200 million customers and have created a payments bank—how much money will you be able to make from them? Unless you are going defensive and say, “I am going to add more content so that I have more stickiness and less churn”. Then it is not a payments bank business—that is a defensive strategy to your telco business. Small banks have a case, but for payments banks, there are smarter people than me and they will be able to figure how to do it.

When do you see the corporate sector coming back? Quarter after quarter, analysts have been getting predictions here all wrong.

It depends on two pieces—industrial complex will see a pick-up in the second half of this year because of the project spending. Our clients who have been able to piggybank and leverage on government fiscal spending will start seeing some pick-up. The bigger challenge is the monsoon. FMCG (fast-moving consumer goods) is highly dependent on what happens to the monsoons—if you have a decent monsoon and the projections are good—we can then see a pick-up in corporate earnings at the end of this year.

Does India have a case for manufacturing?

I think there is an opportunity. We don’t want to be competing with Bangladesh, Cambodia, Vietnam on footwear and apparel. If you think about the overall manufacturing space, the cost structure in China is definitely increasing, and there is also increasing political uncertainty about China’s future.

All this stuff about 3D manufacturing and all, I think that we are still some years away. I think there is a real opportunity to pick our niche—take the case of automobiles and it has been happening for the last couple of years. If we can be competitive in terms of auto and auto-ancillary, and if we can export, there are enough opportunities to build around that. Defence is another big industry—if we get it right, it just need not be for India’s needs. If Singapore Technologies can be a big player, why can’t you have competitive defence players in India building the industry?

I don’t think a large part of the airlines and aerospace and servicing industry is going away in a hurry. You can find enough niches in the manufacturing side where you can actually build out. But the issue is technical skill sets – you need a lot more training competency and infrastructure. For that you need to have credit. For good manufacturing, you need good infrastructure.

Credits Live Mint

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