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The Indian economy has been witnessing sub-7% GDP growth for a year now. Sanjay Nayar, chief executive officer and country head, KKR India feels, given the structural and cyclical issues facing our economy, investors should get used to 6-7% growth rate.
Q: What about the India story itself? We were used to this 8-9% and trying to reach out to the 10%, but now we are seeing one year of sub 7% growth behind us. What are you getting used to in your mind as a private equity investor? Will that damage equity investments flowing into India. Would they want to just know, is this a 6% country, is this is a 7% country or do you think that either way it’s a good story?
A: We have been talking about this for quite some time. We have a structural slowdown cyclical issues as well. We have got a large fiscal deficit, capital spending is down, even savings are coming down and the consumption frankly has gone up. In response to all of that, the current account deficit is high.
So, the adjustment process is not going to be easy. One way is to cut the deficit; the other way is to let the rupee go. There are not too many tools left here. We have to get used to 6-7% growth rate, hopefully bit more benign inflation, but don’t expect inflation to come off dramatically because structurally you have a supply side induced to inflation and that is not going to change overnight. Finally, you will see rates settling down.
The worry that I have is that while we can live with this kind of a low common denominator which is not bad, frankly it is still a pretty good story. The issue is that if oil was to spike up or capital flows turn negative, then the situation becomes a little bit more grim. At the same time, if commodities prices come off in the world and oil comes down and we have a bit of luck on our side, which we always seem to have and if the government can do a few quick steps whether it is GST, few FDI announcements and be a little bit more emollient towards just the noise towards the foreign investors.
It might just help down the sentiment again. So, this is now going to be a kind of a month by month watchful thing as to where we are. But, structurally we are settling down into 6-7% benign inflation. Hopefully, less than where we are today, not really benign and kind of 8% long bond but look at the long bond. The long bond has gone up after the rate cut. So, it tells you what the market thinks.
Q: Focusing on KKR in specific, what sort investments do you have lined up for the future? What sort of hefty gains are you possibly sitting on because there is some apprehension that you have been around for three years but you have done only around six odd deals. More aggression from your side possibly going forward and which would be the sectors and also any sort of exits we can expect from here on?
A: I am not going to give you a full answer to this because we have never commented on our investments or investment pipeline. But generally, if we were just discussing the scenario that Latha painted, it will be a good time to put money to work if the valuations become more realistic.
Indian businesses when they begin to see growth again in the domestic market and domestic capital comes back to work, private equity will support it so you will see more deals. But, the domestic capital needs to come back into the market and they should feel confident about investing.
Q: Where do you think valuations are the highest in terms of sectors at this point in time and say if you were to give us where would you be more aggressive if the opportunity arose?
A: I really don’t have a sector by sector comment, but we keep looking at healthcare and I think it’s pretty expensive. India needs so much of healthcare development, so there has to be some opportunity there in the long run. But that’s just because you asked me a sector wise question.
I would say that the investment and the deal pipeline is going to look very, very interesting once you see kind of a bottoming out of the confidence and a bit of a upturn again, because as I said if domestic capital comes back to work I think private equity will get very active, because where are the avenues today for long-term capital.
The banks are structurally short of long-term capital. The public markets are what they are. I think long-term private equity, both the Indian firms and the global firms can play a huge role. This is an interesting time to stay focused on the companies and the growth plan and look for interesting opportunities.
Q: What’s your sense going forward on the rupee? Are we heading to some thing very bad or do you think we are habitually able to quiten those fears? Are there any levers left? I think we have used up everything - NRI, deregulation of interest rates, everything is over.
A: Everything boils down to the fisc ultimately so let’s leave the fisc aside. For the moment, one can just hope for calming down of the commodity prices, oil prices and hopefully the adjustment process I hope doesn’t happen to the rupee - that will be sad. I don’t know how to answer your question, but we are going to stay in the zone for some time and I don’t see an uptake from here.
Q: Are you looking to negotiate with UB Holdings for their commercial real estate space?
A: We don’t comment on deals as you know.
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