CNBC-TV18's 13th India Business Leader Awards (IBLA), had the first all women jury – A jury that celebrates the power of meritocracy in India. These powerful women leaders manage about Rs 40 lakh crore of assets, which is almost 25 percent of India’s GDP and so it is vital that the economic growth of the country is discussed in depth.
Arundhati Bhattacharya, Chairman, SBI, Naina Lal Kidwai, Chairman, Max Financial Services, Chanda Kochhar, MD & CEO, ICICI Bank, Shikha Sharma MD & CEO, Axis Bank, Kaku Nakhate, President & Country Head,BoAML India. There was also Manisha Girotra, CEO, Moelis India, Shobana Kamineni, President, CII and Zarin Daruwala, MD & CEO, Standard Chartered India.
Below is the verbatim transcript of the interview.
Q: What is your sense? Do you think growth is just around the corner?
Bhattacharya: One of the main reasons why we are not seeing the kind of growth that we would love to see is of course the fact that even today, we are not seeing the investment piece of the thing coming in. I do not think we have a problem on the consumption piece. The consumption piece has seen some dips on account of some of the reforms that have come in, but these are all temporary in nature and we are 100 percent certain that these dips will be behind us shortly and you will see the kind of consumption that we were expecting to see or that was warranted.
The problem lies in the investment piece and in the investment piece, yes, there is still a hiatus and that we are not seeing happening immediately because investment is something where a pipeline needs to build up and the pipeline takes time to build up. So we are seeing a little bit of it coming in now, but we are still not seeing the kind of steady inflows that we would like to see in investment.
Again, two reasons for this. One of course, is the fact that the capacity utilisation is still in the range of below 75 percent. You need that to go above 85 percent for us to see much of new investment coming in. And the second has been the very many changes that have happened in the Indian economy as a result of which people are still probably working out the new models of doing business and that is also something that may be delaying investment a little bit.
But having said that, I do not think growth can be very far behind. A country as large as ours, with the kind of demography that we have, with the kind of macro numbers that we are displaying, growth cannot be far behind.
Q: What would be your thoughts? You have moved a goodish bit to retail growth, but is that just a stop-gap? Would you say that perhaps by the last quarter of the current year or even the last quarter of the calendar, you are going to see maybe the first signs of capital expenditure (Capex)?
Kochhar: First of all, as you said, as far as the macroeconomic indicators of the country are concerned, we are at a dream run. We have never had all the indicators coming together so well, the deficits, the rupee, the foreign exchange reserves and so on, all those together. Talking about growth, also we should understand that we have all been used to finding growth as synonymous to few large corporate sector investments. The structure of the economy is changing, the growth is coming from various other forms as well and not just the large capital investment.
So if you look at consumption, consumption actually continues to grow. Yes, you will have some quarters looking different because of some preponment on account of goods and services tax (GST), but I think these are all transient issues. Overall directionally, consumption continues to grow and therefore even the retail business of the banks continues to grow.
The second is the government spending continues to grow and with the government spending comes a kind of second order benefit to the private sector as well. So as the roads contracts gets awarded, some of those contracts come to the private sector. As railways contracts are getting awarded, some of the multiplier effect is coming to the private sectors. So that is that is second sliver of growth.
Yes, the large capital investment is not there and that is going to take a little bit of time before it comes back. Before it comes back, the capacity utilisations have to go up. Before it comes back, some of the existing projects that are stuck, some solution has to be found. The balance sheets of some of the large corporates have to get restructured, so those are the things that would happen and therefore, capital investment of the large form is a little bit far away.
But then we also have the fourth sliver of growth which is entrepreneurship. Today, the economy is not just about large industries. The economy is about value-chain. So one value-chain on a retail link creates a whole amount of entrepreneurship opportunities and so on and agri creates a whole amount of entrepreneurship opportunities. So in my view, consumer is growing, entrepreneurship is growing, government spending is growing. Yes, what is missing is the large capital investments. That will take some time to come, but I think the growth will increase with these three slivers just now.
Q: One last worry on growth is we seem to be slowing at a time when the global economy is growing. At Standard Chartered, you would be able to testify to that. Global economy kind of took off in mid-2016. We have waited three quarters, exactly at that time we seemed to be slowing. Do you think it is something to worry or is it a matter of time?
Daruwala: I feel that the economy has gone through some disruptions, demonetisation and now, GST. We have seen globally that countries which go through GST actually, pre-GST or post-GST launch, one year they do tend to take a bit of slowdown of growth. And post that one-year, actually we have seen and we have mapped it for five years subsequent to that, we have seen 1-2 percent growth in gross domestic product (GDP) just because of GST. So I think we will see, after a few quarters, after GST stabilises, we will see a pickup in the growth.
The other thing is that as a country, we have a very low tax to GDP rate and clearly, the whole digitisation, the less cash in the economy and GST, all these will have a triggering effect which will take the growth higher.
Q: You have a substantial amount of equity and debt capital segment as well in Axis, besides the bread and butter lending business. If you looked at loan growth numbers only for banks, then it looks like 5-6 percent, but if you look at total loans to the banking sector, to the commercial sector then it was a good 12.8 percent. So not a bad number at all. What is the sense in the current year? Will banking regain a larger or a faster pace of lending? What about loans to the commercial sector? Will it be better than FY17?
Sharma: What you talked about is a phenomena of excess liquidity in the system and therefore, markets being able to deliver debt or equity at a cost cheaper than anyone would have imagined. I am stepping out a little bit in saying this, but I think India is going to see a regime of low interest rates for a while. If that is the case then we are going to see cost of capital come down, both on the equity side and the debt side and that is why we have had a bumper year as far as equity is concerned.
As far as debt in short-term borrowings are concerned, because of the excess liquidity in the markets, lots of corporates have gone to the market, but as that arbitrage evens out, and it will because bank cost of funding lags a little bit the marginal rate because there is a transmission issue here.
So, I would think that in a quarter to a couple of quarters, some of that transmission will get completed and the arbitrage between the markets and banks could narrow and that should certainly see bank lending doing better relative to market borrowing over the next couple of quarters. So net-net, I would think that yes, bank lending to corporates by the time you come to the end of this financial year should be looking different from what it is looking right now.
Q: How much better?
Sharma: That is hard to pick a number, but I would say at least a couple of percentage higher than where we are.
Q: I know in your case, it is a need to business. People do not go to hospitals for pleasure, but nevertheless, are you getting a sense that the economy is on the uptick and that the second half of the current year would be better than the previous second half?
Kamineni: Let me recuse myself from the hospital sector and concentrate on industry per se as CII. What we are seeing is, as what Arundhati and what Chanda and what all the others have said, that the people that need to come to the party is industry to kick the whole growth story up and this will happen. You will see new capacities happening only early next financial year where 70-75 percent, but everyone is spending a lot on optimisation, so we are bringing in better usage.
Also, what really needs to be stressed on in conversations like this is where are the jobs. So that is a huge focus in industry now to see that we get jobs across the pattern because consumption will slow down. Right now business confidence is still high.
Q: But what are your colleagues at CII telling you, that they will be able to generate jobs probably in a couple of quarters? You think that is happening?
Kamineni: It will happen, but it will happen in different ways. It will come from retraining, it will come from industry 4.0, it will come from disruption, but it will also come from new capacities being added and new industries like logistics, e-commerce, all these and I think tourism, healthcare. There are a whole bunch of underlying sectors that from the jobs perspective are underperforming.
Q: Chanda alluded to the fact that there is one issue that is stuck in the throat of growth, as it were. The fact that there are unresolved cases, distressed cases. But now, we have got a buy-in from the highest court in terms of banking up the bankruptcy court. So, on that issue, what is your sense? Since the legal authorities, since the judiciary has backed it up so admirably, are there buyers? Now that is the big issue for stressed assets.
Nakhate: Two things. A lot has been achieved in this year and I would give credit to all my partners on the banking side to also work together to come to conclusions on the distressed assets. The resolution has been placed, the act is in place and there are people who are willing to look at distressed debt. The finer details we still have around three months to go and for certain cases to really do, but in terms of buyers, there will be buyers. And in fact, you could also get private equity guys for good businesses to be able to take care of.
The question therefore remains is some of the assets which has grown over the years have been in diversified business and have cross holdings and interconnections and how we can resolve this and the good news is Supreme Court has stayed away from most of it which is very pleasant to here. But I think that is the real test as to how we can really unfold that. I do believe everybody is working towards that.
Q: Do you think we will see some deals done, some of the stressed cases bought in FY18?
Nakhate: I do think some cases already have started. For example, if you just look at it, we did sell the Bangalore airport for GVK, Chanda and all the people who really backed us up in that whole thing. So it is a question of partnership and to get to the right conclusion. And if we can just continue the track and promoters also have to agree, which they are now coming around that quite strongly. I do believe that we can destress.
The point that we will need to also help and solve is the public sector holdings in some of these, which I also believe where attempts are being made in that regard.
Q: What is the sense you are getting. Is private equity as Kaku saying, special situation funds, stressed asset funds, all willing to bite by the end of FY18. Are you going to see some of these guys also come in and make the sale a little more lucrative for banks or at least a little less hard?
Girotra: I want to step back a bit - the things that we are beating ourselves up about regularly demonetisation, goods and services tax (GST), Real Estate Regulatory Authority Act (RERA), we can go on and on. All these things, the global CEOs see as a big positive. They say you are so lucky, you have this great leader who is proactively doing these things because in the last 30 years we have only seen India push to a corner and then doing a reform.
When we go in with a Strengths, Weaknesses Opportunities, Threats (SWOT) Analysis, they are not going to look at our threats. They say you are great; you are doing great and you sort of getting defensive. So we need to stop beating ourselves. The growth will come. In two-three quarters, structurally, all these things will resolve and they will come.
So to answer your question - there is a lot of good positive response from global investors, PEs, sovereign wealth funds strategic. The timelines are tight so typically global, large strategic do not work in that timeline but the PE funds, the distressed funds, you will see them coming because they understand and you may see them partnership with a lot of local Indian companies who have the expertise.
Q: You see it across the board in sectors like steel, engineering, procurement and construction (EPC), power across the board?
Girotra: Power - I am not so sure but yes, steel, I definitely see a lot of interest, EPC, I see a lot of interest and it also depends on what finally the structure is offered, what is the kind of haircuts that is offered, what is the kind of expertise participation you allow these investors. So people are waiting and watching and also a lot of people are interested in partnering with good local Indian firms because they say we have to work in such a short timeline and deliver in such a short timeline maybe we should partner with Indian firms. You will see a lot of that.
Q: Clearly, we are expecting a lot of deals to come through in the stressed sector, but even in the non-stressed sector we are hearing a lot of deal buzz. You have been at the centre of so many deals all through your life. Now it looks, the game seems to be banks buying non-banking finance companies (NBFC). Is there any other trend in terms of deals? Are we going to see more of mergers and acquisitions (M&A) this year?
Kidwai: Certainly, wearing a private equity hat, there is no doubt that private equity is at a high and we are getting private equity buying from private equity so that is an interesting trend that I think will stay. But certainly wearing the hat I wear for Advent, it is a firm that really likes old steady state industrial sort of firms and the appetite therefore to step into some of these sectors which are not stressed, but to make them just sweat better, work better is very much there.
Q: You mean higher productivity is definitely on the way?
Kidwai: Very much so. I think to make us sweat better in terms of lower costs, ensuring high growth and I hope at the end of the day, also exports, because we have seen Indian industry kind of lose the plot there. We have some real winners and we saw that through the jury discussion that have certainly elevated their own models to being quite global. But Indian industry has remained very domestic in its orientation barring maybe IT, pharmaceuticals and a couple of areas like auto ancillaries.
We have a long ways to go. We can recover our ground in the whole healthcare space, in textiles, and tourism if you think of it as an export generator or foreign exchange generator, India is pathetic in terms of what we are doing there. And these are the areas which could bring us jobs which can bring investment and the good news is we are seeing much more hotel investment. We just have to make sure the tourists come.
Q: Is 5.6 the lowest GDP we have seen?
Kidwai: I believe so. I certainly think the GST kicker that Zarin mentioned and others, is very much on the cards.
Q: Will money get cheaper?
Daruwala: That is beyond my paygrade.
Q: Then let me give you the same GDP question if that is easier. Do you think we have hit the low and the next quarter we see the growth rising?
Daruwala: At least two quarters later for sure.
Q: You have to take the money question. Is money getting cheaper?
Sharma: No, let me take the GDP question. I think last quarter saw the impact of destocking and this quarter itself, we are seeing signs of restocking. So I do think GDP is on the mend. As far as money is getting cheaper, I put myself out earlier as well in saying that we are going to be in a low interest regime for a while.
Q: What is your sense about the deal scene? By the end of this year, do you think that some of the big stressed accounts, the 12 big, one of them gets done?
Q: First up earnings growth, do you see that returning in FY18?
Kochhar: The GDP growth, definitely, we will see it returning. Earnings would depend on how people optimise their cost structures, but people are definitely working on it.
Q: Now for the stressed deals. You have kind of a ring-side view to it. Are you quite confident that there is 12 plus, perhaps 40 that might enter the bankruptcy courts, are we getting at least a handful resolved?
Kochhar: Yes, of course. And I would also put it like this that you are struggling to count the number of cases that have got resolved. Actually many more have got resolved. You see the largest cement deal that happened. So there are many of these large cases that have also happened. But yes, we would look at more resolutions.
Q: What is your sense about earnings growth, profit growth? You have a wide variety of companies you speak with at CII. What is your sense? FY18, much better than FY17?
Kamineni: In some sectors that we are seeing. If you see transport, cars, construction equipment, a lot of these and latent, what is available give out, like Chanda said, the railway contracts, the more of the infrastructure, defence, all these, and let us resolve the NPAs, let us resolve the power sector, telecom is still struggling. So mixed bag, but net-net, our GDP is going to go up and it is going to go up continuously for many years as we see it from now.
Q: In a word, do you think that FY18 finally is the year when we have bottomed out and second half is going to be that bright second half we have been waiting for?
Nakhate: I am very confident that second half will have 16-17 percent growth and year-on-year also the base effect will kick in because you had last December and March being weak because of demonetisation, etc. so both these will definitely happen. And capacity utilisation, you do need 6-8 months to really go through, but people are already on the table thinking of what next.The only thing we should not forget that the global economy itself has a lot of surpluses. So people have to think about that while planning. So what aggressively you would have thought a lot of people putting in capacity utilisation and plans now, they will wait because they also have to see the globe.
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