Given India Inc’s extreme indebtedness, the central bank’s diktat that banks need to quickly clean up their balance sheets and the fact that investment levels cannot rise until this is fixed, the obvious solution is for overseas PE firms to buy up stressed firms at deep discounts — $13.8bn came into India in just the first three quarters of 2015. In which case, 2016 could well be the year of private equity, and the much-needed churn that India Inc needs if it is to remain competitive. The flip side of India having large chunks of industry owned by foreigners is that FDI inflows could surge dramatically – a few months ago, the Financial Times, based on data for the first half of 2015, said India was the world’s most attractive investment destination, beating even the US and China.
And, to the extent FDI is a little shy, the government’s National Investment and Infrastructure Fund will also play the midwife. With Rs 40,000 crore in its pocket, and that can also be leveraged several times through innovative structures, the fund run by a professional CEO and board is going to look for stressed assets – typically stuck projects – to nurse to viability before selling them off. Naturally, foreigners are the preferred choice since, barring a few Indian groups, most are overleveraged. Few of the infrastructure- and debt-warriors of the past – the two are synonymous – will survive in their current form.
There are, though, a few flies in the ointment. If India’s nominal growth continues to remain lower than the rate of interest, the debt burden gets higher for both the government and India Inc – that’s the big concern the chief economic advisor has voiced in the mid-year review. While that’s still no reason for PE firms not to buy stressed Indian assets, the question is whether India’s growth story looks impaired or not since an asset’s viability depends on how fast top-line grows.
As the US recovers and the Fed raises rates, the dollar gets stronger against the euro and, as a result since the ECB no longer needs to have as loose a monetary policy, the flood of funds for emerging economies – already under threat – further depletes. Keep in mind, much of India’s attractiveness so far, has really been due to good luck. The fall in oil prices give a big boost to GDP of anywhere between 1-1.5 percentage points as the mid-year review indicates, and perhaps 0.8-1 percentage points to the fiscal deficit – ex-oil, as JP Morgan’s chief India economist Sajjid Chinoy puts it, India grew at closer to 6%, and that’s under the new series which overstates growth. Had oil, and other commodities, not fallen to where they have, neither India’s growth nor its twin deficits would have looked so healthy, and with the rupee plunging as a result, it’s difficult to see how the country would have looked the bright spot it looks right now – even FII outflows would have speeded up faster than they have right now.
This sheen, however, will quickly wear off if the government doesn’t carry out some meaningful reforms, and soon. Big reforms take time but even the easier ones are getting delayed. There has been, no doubt, considerable reining in of the taxman, but investors are focused on the resolution of big Vodafone/Cairn kind of retrospective tax cases where the progress is zilch. Despite prime minister Modi talking of agreeing to strategic sales of PSUs that couldn’t be turned around, 18 months after being sworn in, not one unit has been sold, and heavy weather is being made of even simple non-privatisation sales like those of HZL/Balco or ITC, Axis Bank and L&T.
Despite it being clear that not allowing progress at the WTO means more US-driven trade partnerships like the Trans Pacific Partnership, India’s bargaining remains similar to what it was decades ago. While there is talk of bringing in crop insurance, big farm reforms which would not only be WTO-compatible but would fix many of India’s chronic agriculture problems – giving subsidies primarily to rich wheat and rice farmers in 3-4 states – have not moved. Amazingly, though farmers have benefitted enormously from Bt cotton, the government has introduced price control on its seeds which was, till now, just a commercial dispute between Monsanto and its licensees; raids and stocking limits, not more reforms, are the government’s answer to getting farm production on track.
Progress on moving subsidies to Aadhar-based cash transfers remains work in progress and, if recent moves on removing LPG subsidies to individuals who earn more than Rs 12-13 lakh are to be taken into account, the government has more or less missed the bus on fixing petroleum subsidies, except in the case of diesel where it was the UPA that did the heavy lifting.
The oil sector remains a mess with production stagnant and big investors like Reliance and Cairn in court against the government and the current price policy makes it unviable for even the PSU ONGC to explore for gas. While the telecom minister has done well to finally agree to bringing in more spectrum for the next auction and to clear spectrum sharing/trading – stuck for years – which will aid consolidation in the sector, the caps remain anachronistic; but the constant rubbishing of telcos over call drops which are mostly related to inadequate spectrum availability is incongruous given how much investment the industry is making.
Good work is being done to encourage electronics manufacturing – the CVD in the last budget was a good idea – and ideas like the NIIF or a seed fund for innovation, insurance for the poor, and the bankruptcy Bill show the government is thinking along the right lines. An attempt is being made to, yet again, fix things in the power sector and, aided by a proactive Governor, there is visible urgency in cleaning up banks.
But as the Fed tightens liquidity and oil prices stabilize, India’s shine will wear off – sooner, rather than later, prime minister Modi will have to show big, and directional, reforms as opposed to today’s back and forth.