Easy money in system only worry for eco: KKR's India chief

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He is a veteran banker. With 25 years of his professional life spent at Citi, he made a move into private equity investment about 18 months ago.

Starting his career with Citibank India, Sanjay Nayar, CEO and India Head of Kohlberg Kravis & Roberts (KKR), the oldest private equity firm in the world, moved to London to run Citi's equity business, which was followed by a stint in the US to handle fixed income and derivatives for the company. Having run Citi in India for over six years with aplomb, he switched to private equity in early 2009.

In an interview with Senthil Chengalvarayan, President & Editorial Director of TV18 Business Media, Nayar spoke on a range of issues including his perspective on the Indian economy, the RBI's policies, and the difference between dispensing debt as an erstwhile banker to now striking PE deals.

Below is a verbatim transcript. Also watch the accompanying video.

Q: You were head of Citi in India before you took up this job you do have experience with equity, you headed equity in London, you did a bit of equity in US but tell us how is it different being a dispenser of debt in India as a banker and being a dispenser of equity?

A: It is a big difference theoretically. I have been here for about 14-15 months. As a lender and as a debt provider and as sort of an enterprise manager, I think the job is very vast. Obviously as a debt provider you look very carefully at credit and sustainability of the businesses.

I think in equity what you begin to learn very quickly are sort of the entrepreneurs, the promoters and the management teams that you select to work with in terms of providing equity.

Q: We in India are fairly sanguine about growth 8.5-9%, the stock markets are booming. Are you worried at all? Are there any signs of froth? Is there anything that we should worry about?

A: Today, I think India is in a sweet spot, in a fabulous spot. At the macro level things look great, and at the micro level companies and sectors are doing well. The only thing I would worry about if we just want to take a headline from me is that I would worry about there being a lot of easy money around whether it is debt, capital or in fact even equity capital.

I don't think all of it is finding its way into creating real assets. As you would say in a crude way, digging into the ground and putting a foundation, putting a factory. There is a lot going into the services sector. But just on a very broad basis my worry is that there is a lot of easy money and lots of it which is sort of sloshing around in the system.

Q: So if we read between lines, there is easy money that is getting into speculation. So are you worried about speculative bubbles building up, whether it is real estate, whether it is equity?

A: Could, I am not an economist, so I cannot make an inference in that way. But I can say from my vantage point, I can see there is availability of a lot of capital. I think what that leads to if it doesn't go into creating fixed assets, it could potentially create bubbles in sectors such as real estate, and capital markets. So unless the absorptive capacity of the economy increases you are always going to have a lot of easy capital floating around.

Q: In a sense you have answered my next question, because I was going to ask you how aggressive can the RBI get? If you believe that there is lot of money floating around, you clearly believe that RBI can get more aggressive on interest rates and it really won't hurt the real economy?

A: I think it's very simple. It's not that easy to infer from this that you can just raise rates. Prima facie I think you can say that you can raise rates maybe 50 bps points or maybe even up to 100 bps up to the end of the year.

But again because I am not an economist, I would say that while that can done they have to definitely balance the impact it's going to have on the potential growth and investment that India so desperately needs. We have been primarily consumption driven. Investment is what we need and if the rates go up you are going to have investments.

Q: You made an interesting point that as long as the capacity to absorb investment doesn't rise, we could get into a trouble. Do I sense a bit of a worry there, because there is huge demand. So what is stopping India from absorbing this capital into creating assets?

A: I think to get investment first you have to have the entire ecosystem and investment climate that is positive. I think generally the demand side of the equation is great. So people would want to put money into a project or create investments to address that.

My sense today is that it has got to do with issues that - if you look at all the areas we are going to invest today, you look at education, agriculture, capital goods, new factories of steel and cement, my sense is that there are still issues on public policy issues, there are issues on reforms which are unclear, there are issues on governance which make it difficult for Indian entrepreneurs to be able to get project approvals.

I think when you compare China versus India, we always say it is so easy to execute in China. I know so many Indian people who are going to Singapore to put up service businesses rather than putting up in India. They are addressing the Indian market from Singapore. So doing business in India is still not easy. It has probably gotten difficult in the last few years which is unfortunate.

So I think all of that doesn't create an ecosystem that makes it friendly to put money to work. That could be one reason. I am sure there are many other reasons but talking like a layman, just watching as things come our way and we talk to a lot of entrepreneurs that it is not easy to get things done.

Q: So that is a worry. So getting our productive assets going is a bit of a worry and you are a little concerned that almost everybody is just concentrating on consumer led growth or looking at consumption?

A: Consumption I think is booming. The demographic shift is obvious, moving towards urban areas is obvious.

Q: You feel at some point that demand will completely outstrip supply?

A: I think demand is already pretty high and I think supply side constraints are getting obvious in many places. That is where you are seeing such a sticky or beginning to see sticky inflation or signs of that. But I think consumption is being further driven or motivated also with the kind of monetary and fiscal stimulus that has gone pretty directly into the consumer's hands.

I just take a simple example. What one could have hoped for probably not putting more money into the consumers hand with lower taxes in the last budget, we are putting more money into the consumer's hand. So it has been a very consumption led economy which in a way has saved us from the crisis. But I think it is high time that we address the supply side of the economy.