Even though domestic investments haven’t seen growth commensurate with foreign direct investments, Alok Kshirsagar, senior partner and co-leader of McKinsey Asia Center, believes the evident lag will be over within the next year-and-a-half. The World Economic Forum’s “Young Global Leader”, in an interview with Mint discussed various facets of the Indian economy’s trajectory, policy measures of the government so far and why India may be okay even if the global oil glut ebbs. Edited excerpts:
With half the government’s term over, how do you think it has fared so far?
Its (the government’s ) efforts can be seen as a multi-pronged approach which can be characterized in three ways. The first of these measures has been the government’s financial inclusion plan—or the JAM trinity as it’s called. The combination of Jan Dhan programme, Aadhar and mobile to increase financial outreach, targeted subsidies, enabling credit, etc. has been the first step in creating an enabling environment. Second, the government’s increased focus on infrastructure through various means is laudable.
The formation of National Infrastructure Fund, greater capital spending in the infrastructure segment and policy measures for realizing value in stressed projects has been extremely helpful. The third part is the banking sector reforms—Unified Payments Interface (UPI), restructuring stressed assets in banks and focus on bond markets.The three, when seen in conjunction have so far, and in the future, will play an immense role in shaping outcomes. Besides that, the centre’s initiatives on ease of doing business by facilitating a transparent, rules-based process and doing away with a discretionary licence raj situation need to be appreciated.
FDI inflows have increased compared to earlier but domestic companies still seem reluctant to invest in India. Why do you think that is the case?
It could be attributed to a certain amount of lag because from the way I see, investments have been going up in the past 3-6 months as concrete policy measures have taken shape. Also, I would expect domestic investments in infrastructure and other sectors to play out significantly over the next 12-18 months. There’s obviously a long way to go in terms of growth and investments but the factors that will play a key part, point in the right direction.
You talk about greater investments in infrastructure but most of it will still have to be driven through banks’ lending, and that has not been happening. Stressed assets are still quite a challenge for banks and they have been wary in lending as much as private players have been reluctant to borrow. Even the government’s recapitalization for public sector banks is only the tip of the iceberg in covering stressed assets. How do you foresee investments driving growth?
Apart from government investment having increased in the infrastructure sector, you would have to look at a couple of things here—on how the government’s policy measures in stalled infrastructure projects, road or power, can be viewed. One, there are projects with financially distressed models which cannot be salvaged. Allowing asset reconstruction companies (ARCs) in has, and will see a significant amount of burden lifted. A significant amount of headway has been made with global ARCs coming into the picture. Another part is projects which are financially stressed but can be completed. The road developer may have overestimated the project’s viability or the project might have gotten stuck in unforeseen circumstances. (In such cases), the government can come in through equity infusion, or the company can cut out the arbitration costs (if the project is being dragged through dispute resolution claims) and complete the project instead. Beyond the point where infrastructure investment in some stalled projects does not make sense, most are seeing resolution.
When it comes to ease of doing business, do you think things have improved on the ground or is the perception of change stronger than perceptible change?
No, I think there has been tangible change when it comes to ease of doing business. Like I said earlier, the measures taken are much more transparent, seeking to do away with the level of discretion allowed in formulating decisions.
The global oil glut, and Indian economy’s honeymoon because of that, might be coming to an end because of OPEC’s recent agreement. How do you see that impacting government finances and the Indian economy?
I believe, as is common consensus, that as long as crude oil prices are lower than $70 or $80 per barrel, the Indian economy would not have too much to worry about. In case of increased oil prices, there are factors that you would need to look at.
Infrastructure driving growth would have a propelling effect on the Indian economy, for example. The focus on increasing renewable energy, a lot of which will come into play by 2017, efforts to ensure grid parity in the power sector, increased rural and semi-urban demand post-monsoons—these would be important mitigating factors when it comes to any strain on the economy because of increased oil prices.
India’s path to GST has been quite thorny to say the least. Does April 2017 look realistic keeping in mind that consensus on deciding rates has been elusive? More importantly, will companies be ready for GST’s rollout?
What we can be sure about is that the government is working on a war footing to ensure an April roll-out. Anything beyond would simply be in the realm of speculation.
The bankruptcy bill has been heralded as the cure for companies and banks looking to exit failed businesses. How important is this to enhance India’s potential in easing business relations?
I believe that it will play a significant role in providing an exit route to businesses and banks that have failed. In the USA, the reason Chapter 11 (of the bankruptcy code) exists is to either keep its business alive and pay creditors over time or to seek relief. The bankruptcy code will help a lot that way, but not for businesses looking to get rid of their creditors or get an easy exit route.