Earlier this week, we saw an unusually aggressive Prime Minister Manmohan Singh telling his ministers they have got to get core infrastructure back on track...no excuses, no question of inter-ministerial turf wars in this...that they have got to get infrastructure back.
Is this the "wow" moment that many optimists about the Indian economy were waiting for and will we see an end to the policy paralysis from here?
Optimistic as ever, Aditya Puri, chief executive officer and managing director of HDFC Bank believes, India's structural story is very much intact if the PM manages to sort out the basic infrastructural concerns.
"So some of these delays will happen: 1) in a democracy, 2) in a coalition and 3) in politics as such. But as long as we keep moving forward within a defined timeframe, I think we are alright," he said.
Below is an edited transcript of Puri's exclusive interview on CNBC-TV18. Also watch the attached videos.
Q: So is this the moment that you were waiting for when the rest of us were writing off India. Could this be the one wow moment because we have had the prime minister talking aggressively for the first time in a very long time or do you think that he is too much of a lightweight to push this through?
A: I am not going to start commenting on the prime minister, but let me say, rather than the prime minister, is this the action all of us were waiting for? Absolutely. What has been happening is that people have talked too much about the big ticket reforms, which are not as important as getting the basics fixed.
Q: Power and roads?
A: Exactly. So since he has got involved -- we have the highest respect for his capabilities and he has worked things through before -- I think the basics would be sorted out. If you sort out the issues on power, you don't have to import iron ore, you sort out some of the issues on food, you sort out the issues on pricing of petrol…I strongly believe that India's structural story is still intact.
Q: But yet we had again, the day after the PM said that, the Pension Fund Regulatory and Development Authority (PFRDA) Bill not coming up before the Cabinet. So would you say that's okay because you have got the presidential election coming, so keep the more controversial things on the backburner and go ahead with things that are within your control?
A: We must understand that politics is far more difficult than running a company, media or anything like that. So what would have caused that? I don't know. But that doesn't worry me at all. I think if the prime minister has said that 'I am going to move these things around' I for one, and given the good start, I think we are almost there. So some of these delays will happen: 1) in a democracy, 2) coalition and 3) in politics as such. But as long as we keep moving forward within a defined timeframe, I think we are alright.
Q: Let's just talk about infrastructure and what the Prime Minister spoke about. You have always maintained that funding is not a problem and that there is no viable project that has stalled for the lack of money. So what action would you like to see especially when it comes to the infrastructure projects now?
A: You can almost define the infrastructure projects. If you see power, it's a combination of -- one feeds into the other -- the pricing of power, which is linked to the pricing of coal. So, if you are going to get coal more expensive you have to pass on power. I for one don't even think that this affects inflation because a large proportion of India's demand is still being met through diesel. So if you sort out the price, you automatically sort out the fuel supply issue. That's one part of it.
You have to sort out issues on land acquisition, if the projects have to come through, if your roads have to come through. You have to reduce the red tape on the ability to be able to step up projects quickly. You have to stop troubling the businessman, with 50 different inspectors and everybody asking for his cake. The things that have to be done are more procedural and policies making it easier, clear, and transparent.
Q: Since we are talking about diesel or a hike in the excise duty on cars, what is preferable?
A: Preferable would be a straight hit on the head and that's an increase in the price. Political issues may result in our having to go the round about way of trying to get the revenue, reducing diesel consumption through affecting it's use. But the preferable route would be a price hike.
Q: In your interview sometime back, you said, “I believe that even if we do not solve our problems, we can grow at 7.5-8%. However, that will be foolhardy on our part. We have the potential to grow at 10%”. Last quarter, we dropped to 5.3% so did that give you a bit of a jolt because that is clearly below potential?
A: When I said even if don’t solve all our problems; I meant there was so much emphasis on retail FDI, now is that really important? Is Wal-Mart going to come and change your supply chain for agriculture? There is emphasis on 26% to 49% of insurance, is that really that important? There is an issue on what is going to happen on banking. When I said even if we don’t solve all our problems, my presumption was that we would solve subsidy and fiscal deficit and make sure that we also brought in some amount of financial inclusion.
What I really meant was that if we go through that, our potential is somewhere in 9% to 10% if we do everything right. But in a democracy you are unlikely to do everything right. If we do half right, we should be in a 7.5-8%, if we go below that then we are where we are. So I presume we are coming to the half now.
Q: So this 5.3% really is a resultant of the twin deficit, which arise out of our diffidence in tackling the subsidy issue?
A: And also the composition of the deficit. If see what the RBI has been saying, a large portion of the deficit is for unproductive uses. Our efficiency of capital has come down from every four units you use to get output now it is five so because a lot of this is not productive. That is one part of it and we also add some saving, which has resulted in a reduction in investment. If we get investment going that is the delta that is required.
Q: One interesting factor that has come up over the last couple of weeks is that in a time when we saw the GDP growth slow down to 5.3% in the last quarter, most companies have grown top-line by about 20%. How do you explain this?
A: I have been asking the same question. I think the IIP numbers are wrong. I think we better get the right thing going because if you take most top-line and I asked Crisil the same question if the top-line is at 20% and if you then figure out to reduce inflation etc and inflation at 8% or 9; that is 11%. Assuming I am negative on mining of 2%, it should be a growth of 6.5% to 7% growth. So how we get this 2% and 1% and 4% retrospective revision; I frankly don’t know.
Q: Do you see a silver lining to that cloud?
A: Not only have they got high top-line; if you see the good thing is the direct taxes are up. The indirect taxes are up while the customs duty is down.
Q: It could also be because depreciation is down because no capex is happening?
A: It is possible but definitely we are better to get a handle on IIP figures to be more accurate.
Q: You have been a banker for almost 40 years. You have been in Singapore and London, Lebanon, Greece - is this the toughest time that you have seen for the economy both local and global?
A: Not really. You are forgetting the 3%-4% growth rates.
Q: But that is structural - we are used to it.
A: We were used to it or we were also used to the license, we were also used to the banks not being able to do anything so why am I positive? If you really look at it, when you look at financial services regulation, I think they feed up most of what they could. There may be some aspects left on development of a debt market etc. Licensing has gone, there is opening up. When I look at it half full, I am just upset that having it all, why are we screwing it up?
Q: What are your clients telling you? Why aren’t they making capital expenditure?
A: There are multiple issues with capital expenditure. Firstly, you have got to have the demand with capital expenditure and they should be able to see that demand for a foreseeable future and then you will have a public posture and a private posture. The public posture seems to be that interest rate determines everything. That’s wrong. I think they are concerned about the procedural hassles.
Nobody wants to set up a power plant, have it not working because you can’t get the raw material. So, the clients are saying they would want a fair, transparent, open and a benign regime as far as inflation and interest rates are concerned. I think we are making too much of this money going overseas, though as the proportion of total investment in the country - that’s peanuts. But there are investments happening, I think the auto ancillaries are going up. So, I think there is investment waiting to happen if we can see light at the end of the tunnel and a growth rate somewhere around between 7-8%, but they are waiting for the slowing of interest rates, lower inflation and a clearer policy.
Q: Are you seeing any trends on the working capital and consumer credit?
A: As far as working capital is concerned, inflation goes up, working capital requirements go down, Margins for the companies go down, but actually margins haven’t gone down either. So, that’s another area where probably demand is not as bad as we make it out to be.
As far as the consumer is concerned, we must understand that most people have, over a period of time, got pay hikes more than the rate of inflation. So, consumer demand has held up very well. I must say that the transformation that has happened in rural India is phenomenal and the growth rate there is fine. Are we beginning to see some cracks? Very minor, which if you may say the advance army telling you that fix it otherwise demand over a period of time, 3-9 months will slowdown, yes, but otherwise its held up very well.
Q: Are they sectoral cracks?
A: This is just the buoyancy and the sentiment. So what happens is if you don’t have investments, you don’t have that many new jobs. If you start to see a slowdown then the rates of income will slowdown. Inflation definitely for the urban consumer has had an issue, surprisingly not so much in rural areas.
Q: You have a huge thrust on rural India, are you getting two different stories from rural India, urban and corporate India?
A: Rural India doesn’t seem to have a problem.
Q: On a lower base?
A: On a lower base, no doubt, but that applies to the whole country, overall given our per capita. We have a large way to go and obviously within that per capita the lower end was there. But they are starting to get roads, they are starting to get a little more electricity. They are starting to get benefits and so we have seen, as we go into the interior and the smaller towns, there is a lot of money.
Q: You have said that interest rates only affect projects and investment at the margin. What’s the outlook, how much lower can they drop from here and banks have passed on about 125 bps that the RBI signaled in rates. So obviously there are structural and systemic issues there. So how are we going to resolve that?
A: The issues are two-fold. Interest rates will be a function of inflation, to control interest rates at that level will be what the RBI does. At this point of time based on the policy indications should the rates have trended downwards a little more than they have? Probably yes.
Q: At the RBI signaling level or at your level?
A: At our level. But the problem is that the deposit rates have not moved. So, when you have a demand supply mismatch, all of us are competing for the deposits. When the deposit rates don’t go down, you cannot have full transmission. But the transmission will come and I am hoping that we should see it going forward from here.
Q: How much is the shortfall in transmission is because of liquidity? What is the liquidity position now because last week we had numbers that looked surprisingly good?
A: It’s now about Rs 90,000 crore again. I am a strong believer that rather than change policy rate the Reserve Bank should infuse liquidity into the system. So 1-1.5% cut in CRR would actually get you about a 50 bps reduction in interest rate, largely because if the economy doesn’t pick up then there is not that much demand for assets and then you have demand supply mismatch on the other side. So, today assets are growing faster, the reason why even though the RBI said in its monetary policy that money supply would grow by 15%, its growing at 13.5% odd.
So, when you have slowdown, money supply at 13.5%, current accounts get affected substantially. Your total cost gets affected. So, if we had ample liquidity you could see very quickly the interest cycle change.
Q: How, in your opinion, has the dollar overshot against the rupee?
A: Tough to say; let me say it has overshot and just inflation differential somewhere in the 52-53 is probably the right level based on inflation differential that we have had and the interest rate consequent – interest rate differential over the last two years and anything beyond that is probably overshooting.
Q: How much of a concern is that because of course we have people saying it’s great for exports?
A: I think you got to break this into a short-term and a long-term. In the short-term, it is a big concern because when you say exports will go up, exports don’t go up in the short-term that’s medium-term. It could be 6 or 9 months. I do believe exports will go up during that period because a lot of our competitors haven’t had that drop in exchange rates. But in the short-run, given the fact that there is a current account deficit and the capital flows are not enough to meet that deficit it’s a concern. Demand and supply will imbalance and you will always have an overshoot.
There again, I think if we got some flows coming in, I don’t know why the gold thing was reversed because that would have reversed the demand-supply issue to some extent and oil prices at USD 100 per barrel or thereabouts.
I think exchange rate will come in that 50-52 if we get these things right. If we don’t, I think we have an issue and it’s important that we recognise in the short-run we have to control imports.
Q: What’s affecting capital flows more, the situation around the world or situations and circumstances peculiar to India?
A: Situation about the world should be positive for India.
Q: Unless it’s a flight to safety, which is so for that money?
A: There again short-term, long-term if we look it – and this is my view that when you talk to the investors they are waiting because your structural story is sound if you look at Europe it’s not going to grow for the next 5-7 years. The US will have tepid growth and I think we don’t need to do much to get back to a 7% growth rate. If we get to a 7% growth rate I think capital will flow both FDI and FII.
Q: Because the 7% growth will automatically assume, we are adopting policy that is right?
A: Exactly, and that you will achieve your medium and structural potential. Since these are isolated issues at the fringes, it does not affect most of the investment coming in. So I did ask the Cisco chief John Chambers that would this affect you if you had 7% growth, he said no.
Q: Is it on the margin?
A: Yes, on the margin.
Q: Is regulation positive enough for it to you to now really attract a large part of household saving into the banking sector or are we still seeing lots of money being kept out of the formal financial sector because of regulation?
A: I don’t think regulation is keeping it out. I think the money that the Indians have a bias towards gold; there is nothing you can do. You shake an old grandma, you will get a couple of tonne of gold coming out. So Indians have a bias towards gold. There are a large portion of people that actually don’t even trust to formalize the institution. There are completing the products that the government is offering you, whether it is a tax free bond or the national small savings.
I think while a lot is made about the proportion of people that do not have access to formal banking we are only about 15% more than the US. So I don’t want to say that we should not make progress. But there is no country that has everybody accessing the organized financial market. I think regulation is not affecting that. We may have issues in terms of whether the banks can finance the growth of the economy a bit more. Well if the government borrows a bit less, we can do that - that has nothing to do with regulation unless you call SLR and CRR regulation.