As the Lok Sabha cleared the much anticipated Foreign Direct Investment (FDI) in multi-brand retail, hopes of fresh investments into the Indian economy has gathered steam. Naina Lal Kidwai, Country Head of HSBC India believes FDI will bring in fundamental changes to the supply chain. This has also paved the path for foreign institutional investors to increase flows to India and therefore, she feels inflows will be positive for the calendar year and it will be buoyant as we enter 2013.
Kidwai is also hopeful about seeing some finance bills reaching a decisive conclusion. According to her, there is a need for capital expenditure to get the supply side, employment and investments in the country moving. She further added that the PMI trajectory looks positive and it suggests an improvement in overseas demand. However, uncertain policy environment may drive away investments, cautions Kidwai.
Besides, 2013 is going to be an important year for meeting growth expectations, stated Kidwai. She expects interest rates to come down in the near term.
But, she is slightly concerned about the liquidity situation in India and feels woes in this regard still remain. There is also a need for reviving priority sector lending in the banking platform, opined Kidwai.
Here is the edited transcript of the interview on CNBC-TV18.
Q: It does look like Foreign Direct Investment (FDI) in multi-brand retail is a vote that will go through today as well. Even if it does, do you think you are going to see a gush of investments since the debate was so acerbic and the mandate so fractured?
A: At the end of the day the signalling effect of seeing a transformational policy agenda with determination finding its way through parliament debated, discussed and indeed steered through is possibly more important than the act itself. I have no doubt that in the long run it will call for very important changes in terms of the supply chain for India's farmers, for suppliers into the system and the fact that there is a mandatory 30 percent clause there which should mean that at least that much investment will certainly happen in the supply chain for these large retail outfits.
I do hope in time that exactly as China has become a very important supplier into some of these large big box retail groups in the rest of the world, India could also become one, supplying to the rest of the world through these players. But, it is in itself a very important signalling effect.
We have seen it through the response of the stock market which was already on a certain upward movement on the back of the confidence that the government was demonstrating even before the session in the Lok Sabha ensued. The stock market did move up and I think for India, that has always been a good bellwether of the mood.
It is important that we are entering 2013 in a somewhat buoyant mood. After all, as far as FII investments into India goes, we have seen a net positive result in 11 months of this year and we have also seen the Indian stock markets come back up to become one of the largest market caps in the region, second only to Japan, Hong Kong and China.
We are sitting in a very good place based on what is basically a sentiment change. It is the sentiment more than the act which has benefited. But, the act itself will in the longer run also yield a very good dividend.
Q: How optimistic you would possibly be about further reforms going forward? There are still about a few days left in the winter session and a lot actually can be done via an executive decision as we saw with FDI in multi-brand retail. Do you think that the government has the energy to do anything more by way of reforms?
A: We are expecting it most certainly. It costs us nothing to expect, but I do believe that there is a desire on the part of the government to see a number of these pending legislations which have been pending now for a couple of years in some cases, to go through. I also believe that we have in parliament today a mood, even with the opposition parties to not appear obstructionist, to have a healthy debate.
At the end of the day, they are trying to enable some of these legislations to move forward. If indeed that is the change, the desire is now to deliver, to allow parliament to function, to allow these important bills to be at least debated and discussed with some going through and some maybe seeing certain amendments.
But, at least there is a desire to get activity that the country so desperately needs. I think this therefore, is going to be the game changer now going forward. The desire to see some of this go through and I have no doubt that some of the finance bills will begin to see the light of day.
Q: I take your point that sentiment has certainly changed towards India. There is general risk on across the world but, India has got a better share of the FII money coming in. What about the appetite of domestic businessmen? The GDP numbers and the IIP numbers are nothing to write home about. When do you see the capex appetite of local businessmen returning?
A: The capex story right now has been flattish, so I think that is the bad news. The good news is that it did not go down. If it is to go up, that is something which I think we all have to fundamentally work on because sentiment is not going to be good enough. There is going to be a lot more important signalling that is required to ensure that it happens.
Capex is critical as you rightly point out because we do need that capex to ensure that we get the supply side going, that we get investment going and most importantly we get employment going. I do think that that is going to be an important benchmark of what to watch out for.
I am just going to read out some numbers which I think are significant. There is this PMI Report which HSBC publishes and the last report for November showed the PMI picking up to 53.7 from 52.9. It has gone up and what is significant in that the trend is it is upward. It showed that it is due to a strong rise in new orders it moved to 55.8 from 54.9 in October. This is suggesting that there is improvement in orders. It has been largely led by overseas demand, but there have been new export orders and also an improvement in the domestic environment.
The PMI Index is tracked quite closely and if this is indeed going to be a trajectory, we are going to see an improvement. It would suggest that growth capital formation is not far behind and the investment cycle will mainly be turning. For the investment cycle we need more than sentiment. We need the right infrastructure.
We need regulatory and policy setting at a level which makes investments attractive and of course regulatory frameworks which are consistent and do not indicate a backwards and forwarding because it is uncertainty in the policy environment which actually drives investment away. So working towards creating the right investment framework is going to be important. But, I believe that there is addressing of this on a war footing now and I would be very disappointed if indeed our expectations are not met because 2013 for India is a very important year.
It is an important year because if we do not get this right, we will lose it completely. I even hear of phrases like India falling to economic ruin being used in media. If we get it right, we are able to pick up from where we are. To just give you an indication of the HSBC GDP number, it is clearly looking forward and it is 5.7 percent for 2012 and 6.9 percent for 2013 in terms of the GDP growth. We are not the only house on the street that has projected an upward movement in the GDP number.
I think there are signals right now that the trough is reached. That there are indeed reasons to believe that India goes back upwards. It will take time before we build back to the 8 percent sort of numbers that we would like to see, but there is no reason to believe that we cannot aim to get there and keep pushing to ensure that we get the right activities going from a domestic standpoint.
Q: What is the sense you are getting with respect to the interest rates? Do you expect the Reserve Bank to start easing as early as this month? If they start cutting how deep can the cuts get at all?
A: I have been of the camp which believes that it is time interest rates come down. I do think we need to give a little impetus back to the industry on this front. I fully understand the issues that RBI faces in terms of concerns on an inflationary front. Particularly as subsidies get removed and some of those price increases whether fuel, oil, gas or others begin to go through the system, it causes inflationary concerns.
There are obviously concerns around the fisc itself which RBI wants to see more than signals. Even activity that ensures there is a containing of the fisc, at least at current levels if not an improvement, are the things which the Reserve Bank rightly looks at. We do need to begin to offer signals to industry that interest rates are indeed on the way down so that it kick-starts investment.
Is that going to happen next month? I do not believe so. Right now, RBI has continued to put liquidity back into the system which has been a good step. It could have led to interest rates coming off, but it has not come off simply because we still have liquidity issues and there are still concerns in the environment in terms of restructured loans or NPAs, whether in the SME sector or indeed in sectors like infrastructure and power all of which put up cost back into the system and therefore, keeps interest rates sticky.
But, we do need to signal that interest rates are on the way down and I think at least to share with you the HSBC research view, it would be a 50 bps cut over the year. It is going to be very gradual when it happens, calibrated and I do not believe it will necessarily happen next month. Having said that, I would love to see it happen next month.
Q: I wanted to focus on some specific issues with regards to foreign banks and regulation. For example, foreign banks are now faced with a new set of priority sector obligations where big foreign banks can’t use exports as PSL or priority sector lending unlike what existed previously. How is HSBC in specific looking at these developments? Do you think that it can be given that timeframe of five years to adjust to it?
A: Five years is a challenging timeframe to go into doing 13 percent of our entire book as agricultural loans when we don’t really do agricultural loans anywhere in the world and have not done so in India. The priority sector norms are tough and I think this kind of directed lending which is difficult even for public sector banks, let alone private sector banks to achieve, needs to be relooked at. At the end of the day, directed lending is all a cost into the system.
Where directed lending has typically been correlated with higher non performing loans or assets what we end up with is a position where there is a cost in the banking system and as an industry who ends up borrowing for its investment pays the price since there is no free lunch at the end of the day. I do believe, the whole structure of priority sector lending across the banking sector needs a relook.
Prioritizing needs to happen around what is important for the country in the ratio of what drives the economy as well. Exports are critical, they are important and I think they need to continue to be supported because on the back of exports are a number of small SME type of players who are important in terms of what they do for the economy as a whole, who are collectively large but, individually small.
Exports continue to be important and so is infrastructure. You would question why some of these sectors would not be included or continue to be included. I do think the priority sector lending format as it exists today needs to be revisited. There are very few countries in the world, in fact none to my knowledge that has such high directed lending as India does.
To require the banks to bear the cost of what is basically subsidising sectors as it does is a cost to the economy as a whole. It is a cost to industry and it renders industry less competitive. At the end of it all the strength of the banking sector is the reflection of the strength of the economy. The strength of the banks is the function of the strength of the lending book also.
Q: Why did your deal with RBS fall through? Would not that have given you more branches and therefore perhaps helped in greater access and greater inclusion?
A: Three years into the deal and the long stop date of November 30 was reached and we just weren’t there with the transactions. So it was a long time and it was jointly agreed upon that we let it go.
Q: What caused that long schedule, was it more to do with regulatory hurdles or was it that HSBC's interests changed?
A: No, three years down you take a call and at some stage you just had to jointly agree that it isn't worth waiting anymore.
Q: HSBC India has been in the news for allowing some alleged tax evaders to hold accounts in its Geneva branch. What is the latest you have heard from the government on this? How is the issue getting resolved?
A: I am no wiser to disdain you, so nothing to say other than the fact that the country has for very long and rightly looked at ways to curb what is a really a big menace and that is the black money in the system. People like me have grown up knowing that it was a reality and that there was a parallel economy from the days I began to study economics.
We do need to make sure that everything to do with tax evasion is resolved and for the country to look at what it needs to do in that is absolutely the right thing.
Q: I wanted to know the latest development on it, has the government come up with any penalties or has the regulator imposed more processes within the bank in terms of KYC?
A: No because at the end of the day the payment of taxes is the work of individuals, isn't it? At the end of the day if you get a salary, the way you pay your taxes has to be your responsibility. The responsibility is for each individual and each citizen to ensure that they comply by the rules of the country.