India laying foundation for long-term, sustained growth: Manish Srivastava
Singapore: India’s National Democratic Alliance (NDA) government is laying the foundations for sustained, long-term growth, and the country is gradually moving towards a more transparent, cost-competitive, and innovation-driven economy, Manish Srivastava, executive director, Amala Management Singapore Pte Ltd, said in an interview. Edited excerpts:
Do you feel the Narendra Modi government has laid the groundwork for sustained, long-term growth in the economy? What can keep India growing in 2018 and beyond?
The central government is making a genuine effort to completely modernize the core of the Indian economy. Across most non-policy levels, there is a clear transition to a rule-based system of decision making. Beyond rule-based decision-making, policy-making is being pursued with a basic honesty and with the intent of improving the lives of citizens—no other priority comes close. Technological enhancements are also being used to implement more robust and efficient service delivery mechanisms. Through this agenda, the government is laying the foundations for long-term, sustained growth, and India is moving—gradually, yes, but sustainably and surely—toward a more transparent, cost-competitive, and innovation-driven economy.
Of course, the Modi government does benefit from the work of its predecessors, but simply floating such an assertion without essential qualifications tells only part of a politically convenient story. (It cannot be denied that) several of the initiatives it is pursuing were started under previous governments of all ideological stripes. Nor should we ignore the beneficial effects of the march of technology.
But it is essential to acknowledge the political will required for effective execution in face of great political risk—plans must be implemented, after all. This execution is enabled by the repeated endorsement of the Modi government’s mandate through the electoral process. They have not overlooked the importance of winning elections for the pursuit of their economic agenda, and have amassed a formidable and successful election machinery since May 2014—even if this has meant an unfortunate tolerance for stray extreme behaviour.
Specific policy initiatives that I would take investment cues from include efforts to formalize the economy and bank the un-banked, massive infrastructure build-outs, the efficient delivery of government welfare, and a formal structure to facilitate business exits.
GST (good and services tax) implementation, demonetisation and the digital payments push are together moving the Indian economy to a much more formal structure. Clearly these have resulted in severe short-term disruptions, personal inconveniences, as well as economic hardship—especially in cases where tax arbitrage was the sole competitive advantage. Such structural reforms are also difficult to achieve in one iteration. But longer term, a formal and transparent economy will result in efficient and cheaper availability of all factors of production for businesses, making them more competitive and scalable. An improvement in government finances from formalization would also result in lowering of tax rates over the medium term.
The JAM trinity—Jan Dhan Yojana to universalize banking access, Aadhaar (unique identification number) to accurately identify the populace and mobile phones to reach out to them—is dramatically altering delivery of government benefits and services. A more targeted and transparent delivery will ultimately make for a happier populace and better government finances, again driving longer-term sustained growth in the economy.
Considering the close win in Gujarat, and also the fact that several big states are set to vote this year, coupled with the fact that the budget deficit in the first eight months of the fiscal year that ends in March is already at 112% of the full-year goal, do you see a populist government in the run-up to 2019 general election? And if so, will that cause investors to lose their nerve?
While there is much else to be discussed in political forums, I saw two things in the Gujarat results that investors should take heed to. First, BJP (Bharatiya Janata Party) gained vote share across the state, and second, most of the gain was in urban areas. With that in mind, we are likely to see a more concerted focus on rural initiatives from BJP-led governments in the run-up to general election. You can see that already in the supplementary budgetary grants brought into Parliament after the election—almost all of the allocation was towards fertilizer subsidy, MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) and highway build out. We should also see some shift in terms-of-trade towards agriculture. This might imply higher inflation levels, but within the 4% ± 2% bound set for RBI; I do not see a reason for investors to be worried.
As far as the budget deficit is concerned, it is important to highlight that GST implementation is still a work in progress. Therefore, taking early fiscal deficit clues would not be appropriate in the current fiscal. For instance, in November, only about 53% of the assessees filed returns—16-17% will not file due to compounding. Also, all returns filed until now are self-assessments, leaving scope for significant corrections.
Even otherwise, a lot of GST leakages will get plugged once the e-way bill system is put in place by 1 June. A laminates company I work with should have been a natural gainer from GST implementation, since a large part of that industry is informal. But, so far, they have not seen any gains because a lack of e-way bills is helping the informal sector avoid GST payments. Coming back to budget deficit, I think the government could use some recourse to exceptional circumstances and avoid FRBM (Fiscal Responsibility and Budget Management) targets for current year. I do not see an issue at all with resource generation for next year.
Nineteen state government affiliated to the current ruling dispensation offer an unprecedented ability to change people’s lives if there is political will.
The year 2017 has been a great one for the Sensex and the Nifty. But will the bull run continue? What will be the drivers? What are the sectors you are bullish on and why? Which are the sectors that you are underweight on?
Given the likelihood of sustained long-term growth built on strong foundations, I am positive longer term on the Indian markets—there is nothing unique there! I can see that same optimism among the firms I work with and interact with on a regular basis across sectors.
It is very difficult to call the markets for 2018. Anything I say there will be third hand. Very obviously, the global economy is doing well, growth has improved—the last IMF (International Monetary Fund) report had raised the growth forecast to 3.7%—and most major economies are doing well. US tax-cuts kicking in soon are said to be further stimulus. In general, the fiscal policies in most major economies are accommodative. On the monetary policy front, most central banks are tightening gradually. If you want to be an alarmist, then global debt-GDP (gross domestic product) at 325%+ is at an unprecedented and unsustainably high level. But, all these concerns should be already reflected in market prices.
Last year saw a surprise on economic growth and most markets did very well. What could be the surprise in 2018, if anything? Accelerated monetary tightening? Oil price shock? Something else drying up global liquidity—maybe cryptocurrencies? There is a lot to be said here, and you will find a lot of people saying it. But I will stick with a forecast of tried-and- tested mid-teens market return and a stock pickers’ market in India!
If the Indian economy will see strong growth longer term, a lot of MSMEs (micro, small and medium enterprises) across sectors will become much larger businesses and, hence, offer immense opportunity for investors. As a result, I see another 5-7 years of outperformance by mid- and small-cap stocks. Two set of sectors I am particularly bullish on are consumption and infrastructure-related sectors. Discretionary and non-discretionary consumption is seeing a boom in India as cultural shifts in attitude towards personal debt is leading to a preponement of consumption. This is on top of an increase in discretionary incomes due to other economic factors. NBFCs (non-banking financial companies) financing this consumption are also seeing massive growth, but, to me, that sector is reasonably priced already.
The other sector I am very bullish on is infrastructure—not on the asset ownership side, but more so with regard to services and other ancillary plays on the theme. Well managed construction service businesses tend to have high RoIC (return on invested capital)—could easily be in mid-20%s—if cash is not diverted away into assets. IT (information technology)-led interventions can materially improve even those RoICs. This RoIC is relatively under-appreciated by markets and offers significant investment opportunities today. I work with several companies in that area and am seeing high growth at reasonable valuations.
What is your take on NDA’s efforts at the clean-up in the system in terms of stressed assets and unprofitable firms?
This is a material impediment to growth. NPAs (non-performing assets) at banks constrain the availability of capital to industry, and non-resolution also blocks productive capacity in the economy. Previous attempts at resolving the NPA issue have been marred by an inaccurate focus. Too much attention has been devoted to the stress on banks, rather than the stress at the business level. The priority has been minimizing provisioning losses at the bank, and several initiatives... have all failed to get any material resolution primarily due to this wrong focus.
To me, this government is moving in the right direction by focusing on making business exits easier through the insolvency and bankruptcy laws they have introduced. Such a focus on the business side of the NPA issue will go a long way, and facilitate resolution on the banking side, too. We are talking about real resolution here—not Mr. (Raghuram) Rajan (former RBI governor) style revealing of an already revealed problem and making provisions to reduce capital at banks when markets were already valuing these banks at a significant discount to book. The government’s initiatives on bankruptcy and insolvency in addition to re-capitalization of banks announced this November has already resulted in frenzied activity in this space. I am seeing several global players and spare capital getting attracted to the upsides from resolution. This is great news for the space.
The bigger problem to me, though, is a lack of appreciation in society at large for the factors that lead to businesses turning non-performing. Contrary to popular perception, the proliferation of NPAs is not just the direct result of wanton profligacy on the part of unscrupulous promoters. While there are certainly bad actors in the system, many businessmen make honest commercial errors of judgement. Furthermore, market environment changes—many times led by government and judicial decisions—are also contributing to NPA creation. We collectively need to realize that the businessman is not always a villain and need to give them benefit of doubt.