In an interview with CNBC-TV18, KV Kamath, President of New Development Bank spoke about Trump, India and the threat of a trade war.
I am very bullish on India. The recent numbers clearly indicate that the growth momentum is coming back particularly on the industry front, he said.
Below is the verbatim transcript of the interview.
Q: Let me start by asking you about the latest as far as the NDB is concerned. The last review that I saw that you had presented, you had talked about being on track in terms of your lending strategy of about USD 32 billion by 2021, but what is the outlook like as far as 2018 specifically is concerned?
A: For 2018, we are planning to approve loans of USD 4.5 billion. That puts us firmly in the target range that we want to do. We expect that we will scale it up by about 25 percent annually for the next few years till we hit the target we have. Capital has been coming on schedule. We should by January of coming year hit USD 5 billion in capital, in another three years we will hit that.
Q: So, no concerns on that because there were some concerns that have been raised as far as the capital is concerned?
A: Not at all, many of our members have brought in capital ahead of schedule. So that is not a concern, at least in our minds it wasn’t and it has proven to be not a concern. As we would have said last time we had raised renminbi funding in the local market, continuous to be very an interesting play because renminbi affords itself to be swapped into dollar at substantially low cost lower than what you would do if you were to access the dollar market for borrowing, the very interesting options there. Hopefully, this year we will hit India.
Q: What is the hold up there?
A: It is very simple, we need to get our rating exercise done. That is now schedule for between this month and next month. So, hopefully in the next 8 to 12 weeks we should have a rating and then accessing the Masala bond market becomes a possibility.
We want to see whether there is something that we can do out of Gift City. So, if we were to do a Masala bond issue, should we not look at options that Gift City would provide us, on an off-shore basis. So, some interesting works that my colleagues will need to do.
Q: By when do you believe that you will be able to take a decision on this front and what could be the quantum?
A: This should be the third quarter. Honestly, we would first test the water with reasonably appropriate issue. I would think about USD 200 million would be right for us to test, make sure that things work, systems work and so on. Third quarter should be a timeline that we can aim at.
Q: Let me also then ask you about lending to projects specifically in India, both from a government perspective as well as from a public-private partnership (PPP) perspective? The first one of course was the Madhya Pradesh (MP) roads project that the NDB has gotten involved with, can you give us an update on what we should now expect in 2018?
A: You are right. We have done projects in Madhya Pradesh covering water, covering roads. We have done canal relining project in Rajasthan that is the main canal that flows through the state. We have done again on a shelf projects covering rural, mostly rural, water and couple of metros Mumbai and Indore. That is the current slate.
Q: What would be the total quantum?
A: Our appetite for this year and next, if I look at two years, will be broadly in the range of USD 2.5-3 billion. We should definitely do half of that this year and be on schedule to do our things next year. What we have in a way now determined for ourselves is we can move at speed or something that I had said I aspire to do. But we can now say that we do that. We can do a project in maybe 3-6 months by streamlining the processes, by following domestic rules and regulations for environment, procurement and social and other aspects. That makes things much simpler and easier to implement and all those I have gotten streamlined.
Q: What about National Infrastructure Investment Fund (NIIF) as well because the last time that we spoke with you, you said that active conversations were on with the government on that front? Where do things stand?
A: On the PPP front, because that will cover the whole, we are just now getting ready to get into non-guaranteed private sector type or any other structure type of a lending or a proposal. I would think that virtually by our next board meeting, we should have the first few proposals coming up. So, by June we should be ready to get on that. What route it will take in India we will need to talk to the government. Because if the government feels that there is strong demand from states for what I would call quick appraisal and quick disbursement and probably they would opt for going thorough us for their immediate requirements rather than through structure. But for us as a bank, it would be interesting to understand what options are there in the PPP world in funding through vehicle as it were and so on.
Interestingly, there are some of our member countries where that seems to be the opportunity mode. A whole lot of PPP is happening and they want to see how they could be funded and so on. So, we will try to wet our feet in all these markets to build experience there. In the meantime, get along with our core business, which is infrastructure financing through the government window.
Q: Let me ask you broadly about the Indian economy now, and we are still on the cusp of a revival at least when it comes to investments and the hope is we will start to see things pick up from hereon. Growth continues to be driven by consumption, what is your own sense of the state of the economy and about the big infrastructure lift of that could then delivery on the growth potential?
A: I am very bullish on India. In fact, I will also pre-phase that I am very bullish on all our member countries because things seem to be turning for the good. Talking of India, the recent numbers clearly indicate that the growth momentum is coming back particularly on the industry front. If I were to break down where will growth happen in India, I see clearly three areas. This time around the prime driver of growth is going to be infrastructure and that infrastructure driven by government’s efforts in various areas. I think that is to be commended in an economic context, infrastructure context what the government has done.
On the back of that, I think employment generation will pick up and you are already seeing consumption, as you rightly said as key driver, I will only expect it to accelerate even more. Because what is now going to happen is the industrial cycle will get a boost because of the spending from infrastructure, which is going into consumer hands and their income is going up and then the next engine or the next cylinder of the engine, which is manufacturing starting to start at a full speed as it were. I would expect that to happen in six months.
Q: What is the number that you are working with in terms of growth?
A: Initially, let us look at 0.5 percent increments. I would like the number to solidly be at around 7.5 percent and then it is going to be very interesting, whether it is going to be 0.5 percent increment or 1 percent increment. At 7.5 percent, you have the momentum to move up from 0.5 percent increments to three quarters to 1 percent increment. Because it will be several drivers of growth not just two cylinders or three cylinders or one cylinder struggling to provide momentum.
Q: Let me speak to you about each of these cylinders of growth – the concern that you might have perhaps on the cost of capital and I am not just talking about Indian, but globally as well we are now seeing more central banks move away from accommodative monetary policy to tightening interest rates specifically the US Fed. What is your outlook as far as cost of capital is concerned?
A: Again the countries that you mentioned are on different cycle. Their interest rates certainly will go up. As far as country like India is concerned, I would think that you need the interest rates to be salutary to go to growth rates, which exceed at 7.5 percent base that I am looking at. You will probably need to look at a decline in interest rates to go to a next step.
Q: But is it a possibility given where we are today and given where the bond yields seem to suggest we could be headed?
A: I will look at it very simply. Why should interest rates be where they are in India? What is that fear that is driving us to signal? There is enough literature, not me again I will not delve into this that enough economists have done to indicate the lag between these two rates. I think that we now need to try a different prescription or try a different base.
Q: Because the current debate is not on whether the Reserve Bank of India (RBI) has the ability to cut, the current debate is whether we are in for a protracted pause or in fact if inflation starts to move up and there are signs of structural tightening as far as inflation is concerned the possibility of a hike you are saying that there is room for a cut?
A: Let us look at it this way, I think something has gone askew here. All through and I have looked at the Indian situation, the signal in terms of rates by monetary policy authorities then is the signal for bond rates to move in tandem. That is not happening just now. To me that raises a bigger flag, which authorities need to look into as to why is this so and how do you then bring this into balance as it were. So, otherwise we are in a situation where even if somebody were to tighten the policy rates, the bond rates will behave in a manner, which is distinctly different.
So I would think that India is getting in a very interesting situation in terms of how interest rates will need to be looked at going forward. What are the triggers, which will move interest rates in which direction has to be re-looked at? At least in my experience in the Indian side this is for the first time that this is happening.
So, I think there has to be consulted thought on movement of interest rates and how to get them in balance, to meet the objective of growth. So far we have said that we are doing certain things to meet the objective of inflation containment, fine. Are there co-relations right? What are those things driving inflation, which need to be corrected by an interest rate hike? I think a lot of tough questions need to be asked as we go forward.
Because at earlier comfort that an external observer like me would have that well when the policy rate is signalled down bond rates will come down. Suddenly seems to be it is not working that way. Whole lot more thought is required on interest rates front. That become imperative for growth and this country needs growth.
Q: Since you are talking about the fact that we need to re-imagine the prescription when it comes to interest rates let me also then ask you a related question and the need to re-imagine the way that we look at public sector banking in this country and I am not going to ask you about any specific instance but there is stress in the banking sector. If you take a look at the non-performing assets (NPA) picture 11 out of the 21 banks at this point in time are under Reserve Bank’s prompt corrective action (PCA), five more are expected to be included in that number. What is the prognosis? What is the way forward? If I were to ask you about what to your mind is the need of the hour today what would you say?
A: Again being away, I have not looked at it in any great detail I will be very honest. This is something that the banks should study and comment on. I read about what the government wanted to do that is inject capital. I would think that is the first step that needs to be done for any bank if indeed that is the challenge that is being faced. So, capital needs to come in. Clean-up needs to be done simultaneously.
Other than that the third element is get right people to run this structure. I am not saying, as I said I do not know people who run the banking system now in the larger context, but if you need to get the skill set right then you get the skill set right. So these are the three things that a bank can do.
Q: We have been doing a series on CNBC TV-18 and we have had people like Montek Singh Ahluwalia, Bimal Jalan and so on and so forth comment on what the prescription or the road ahead could be. A lot of suggestions have come in that perhaps the ICICI Bank should be an example that the government should consider to take forward. May be privatisation at this point in time, there is no political appetite, no political will either for that. To your mind what could be that bridge between privatisation and the fact that we need to move beyond where we currently are?
A: Honestly, I have not thought about it, but I will say this get the capital in first, get the banks to be sound and then the government will be in a much better position to take a call on how it wants to take the next step regarding banking. But at this point in time, clean up and capital will be the absolute priorities that the banking sector would need. This is a prescription for any banking sector anywhere which is in the situation that we are in.
Q: Let me talk to you about one of the other big global concerns and that is the possibility of a full blown trade war on account of the tariff imposition ordered by the President of the United States. What is the reaction in China because so far, we haven’t heard on very categorically whether there is going to be retaliatory action, the threat of retaliatory action whether it is from the EU or China is being talked about but so far we haven’t seen any movement?
A: I would think that we need to watch the situation a few more days to understand what are the next steps on both sides in terms of retaliation or no retaliation or negotiation. My own view is that this whole move has to lead to negotiation because I do not think anybody would be prepared to go down and start looking at a full blown trade war, which throws everything into chaos. Part of it, if you see initially when there was this announcement, global markets went into a nervousness but then they recovered.
I think the expectation now is, ultimately it will be bilateral negotiations that will be held between various trade partners to sort out whatever are their current issues.
Q: Production cuts – do you think China would fall for that?
A: Could be a variety of measures, could be – I am not saying that tariffs that have been talked of will be removed. Similarly, there could be tariffs on other side happening. People could agree to a tariff cuts where convenient but clearly, each country will look at its own needs and priorities in taking decision. So we will see a very interesting new equation development. That is for sure but I would hesitate to say it will be a full blown trade war.
Q: That is your own sense on growth in China at this point in time of course there is plenty of interesting developments that have taken place on the political front but in terms of growth and specifically in terms of the One Belt, One Road aspiration that China has and whether the NDB could play a role in that in any form or fashion?
A: If you look at China, there was earlier some scepticism but I think the sceptics have been proven wrong over the last two years that I have seen the country. There is scepticism that growth would come down but when you look at where growth has levelled off – it has levelled off where the government said it would level off at around 6.5 percent and there are certain other indicators which prove that this growth is happening on the ground as it were.
A year and a half back, two years back there was talk that the renminbi is going to weaken to over 7 a dollar, the renminbi today is strengthened around 6.3 at this point of time. So clearly, there is strength in the economy which is reflected. One of the proxies, which is the exchange rate the country has got.
So there is real growth happening. So China has found the mantra for growth and they stick to that. The mantra for growth as I rerate is continuous investment. Continuous investment, the act of investing is seen as growth providing and the fruit of investment when that asset is put to use then provides the return on a long run basis. This strategy is very simply and beautifully executed including in the city of Shanghai. If there are four seasons, there will be flowering beds. You may laugh at this but there are – flowering plants are re-potted, there is a backend system which is generating this, there is a transportation system, the potting system, army of gardeners is doing, so everything is productive activity and of course in this the return is – the joy is when you look at the flowers.
There is – and I used this as an example but you can do it across the spectrum and you will find the similar efforts at each and every aspect of economy using to keep growth going and I think it is a very workable model which other countries could look at.
As far as one bed, one road is concerned, NDB does not have any projects, which are in that sector and neither do we see anything in our pipeline – the near-term – so we at this point in time are not in that initiative.
Q: You are here in India while the solar alliance is also meeting, one of the sectors that is causing a fair amount of concern for instance is the power sector but that has more to do with gas and thermal. There are concerns though on the solar side as well, given the state of the auctions and whether or not the tariffs are going to be viable or not, what is your own assessment?
A: On solar, my view is that today it is no longer a fancy product. It is a product – its time has come. So whether it is 3 cents or for 3.5 cents, I would think the price curve is going only one way and that is down because imagine, this is 3 cents now or 3.5 cents in India, with the current level of committed projects, you imagine a commitment which is 5x or 10x of what it is, you look at offgrade type of structures, you are looking at cost dropping dramatically and these sort of structures are not only in India but also in large markets like China and in due course could be in Africa. So the whole equation as far as renewables is changing dramatically in favour of renewables.
Nobody can today afford not to be looking at renewables seriously. I would go so far as to say that there may be – probably the time has come where no new fossil fuel plants will be justified unless there are extraordinary circumstances which justify these plants. So between solar and the wind and water, I think most of your requirements could be met going forward.
Q: If the bet of the future is on the renewable side, what about the current power sector, the banks are sending out SOS to the government saying that the power sector could be the new steel sector and most of the steel assets we know are going to the insolvency and bankruptcy code (IBC) process.
A: You look at the country like India, before you get adequate solar to meet your future needs and your past needs - I think you have the economic lifecycle of the existing coal based plants over that period and those should be able to repay you your borrowed funds.
The challenge on coal – which a country like India needs to probably look at - is can we retrofit some of these plants to get them to be less polluting, could we do that on an emergency basis, could we increase efficiency. So there are very interesting ways that over the next 15-20 years when the residual life of these plants – you need them. You cannot mothball them today because you need that power.
So for that residual life, can you get them to generate more efficiently, I think, should be a question that countries like India should ask themselves on their existing generating capacity while adding new capacity using a solar.
Q: What do you see as being the single biggest opportunity from the NDB’s perspective in 2018 and I will end by asking you much more specifically about India, we have had this conversation about the stress in the banking sector and the worry now is that perhaps there is a bit of a policy overreaction on account of what we have seen happened with Punjab National Bank (PNB) and so on and so forth, could that lead to a credit freeze which could then impact growth?
A: About the banking sector, frankly today India – the market is coming off age very quickly. That is the capital market. So there will be where there is need and the company’s rating is appropriate, it will have choice in terms of either looking at a bank or at the market to fund its needs through bonds and/or equities as need be but having said that, in India, the cash flows are strong and when that residual demand picks up, which as we discussed earlier, has to come out of increased consumption, I would think that cash accrual themselves would meet a large part of the needs to invest into industry. So I don’t expect a cash crunch impacting creation of a new capacity. So that is one.
As far as NDB is concerned, the foundation work is over and we will now drive the super structure and we will drive it at a pace that is appropriate and at the pace that needs expectations that member countries have set for the NDB.