Naina Lal Kidwai: the public sector will fuel India’s growth

The outlook for the Indian economy is bright and the country is now ripe with investment opportunities for foreign companies, according to the chairman of HSBC India and HSBC Asia Pacific Director Naina Lal Kidwai.

“Modi’s first year in power has been a very strong year,” Kidwai said, in an interview with Asia House following a private briefing focused on Modi’s first year in power held for corporate members.

Commenting on the economic and investment climate in India today, she said: “It’s a very positive climate. There is a lot of interest in India. GDP growth is a great indication. You only need to look at the size of India’s consumer market. This all means India is an attractive destination and one that cannot be ignored by large corporates.”

Nevertheless there have been criticisms from some quarters that the speed of reforms is not fast enough and a Macquarie report in May referred to a “mismatch between market’s expectation and on-the-ground reality.”

However Kidwai, the first woman President of Federation of Indian Chambers of Commerce and Industry (FICCI), remained bullish about India’s prospects.

“Modi’s engagement offshore has drawn much foreign investment,” she said. “He has lifted the caps on FDI in insurance and defence, provided clarity on the regulatory front, held the recent coal block auctions and the spectrum auctions, as well as the removal of subsidies. Already the fuel subsidy has gone and the elimination of subsidies is awaited in other sectors. The issue really remains about skepticism which has been caused by people’s expectations which were at the outset unrealistic,” she added.

The statistics too are positive. India’s Consumer Price Index Inflation has fallen, the fiscal deficit has reduced to four per cent of GDP and the country now has a current account surplus for the first time in more than seven years.

India posted a 7.5 per cent growth in the first quarter of this year, exceeding China’s growth of seven per cent. After growing at 7.3 per cent in 2014-2015, HSBC is forecasting growth of 7.8 per cent this financial year, which would outpace China and make India the fastest growing economy in the world.

But domestic consumption, particularly rural consumption has fallen, which should, conversely, be propelling growth.

Yet Kidwai said she was confident the investment cycle would pick up. She pointed out the coal block auctions had only just taken place. “That was one of the big reasons for the stoppage in power projects,” she explained. Indeed stalled infrastructure projects were one of the key reasons the Indian economy slowed down under the previous UPA Government. She said fifty per cent of stalled projects were due to “policy paralysis” in the Government and fifty per cent due to “broader issues.”

“I think expectations were unreasonably high [about this Government],” she said, explaining why there was a perception among some people that reforms had been slow. “I think things have changed on the ground,” she said.

“I don’t know if reforms could be faster with the nature of issues that the Government is facing being as knotty as they are,” she said. “We need to give the Government time. We cannot expect a magic wand in the first year.

“If you look at an industry like defence, the Government is on a mission to push domestic manufacture in it – that might be nascent right now, but we are already seeing a lot of interest in that,” she added.

Kidwai, who also edited 30 Women in Power: Their Voices, Their Stories, a series of essays written by some of the greatest female achievers in India, which was published last month, said foreign investors were positive about India and “there was a lot of excitement.”

But she said they were “working with caution partly because of memory [of earlier experiences in India] or its reputation of not being easy to do business in.”

In the World Bank Group’s Ease of Doing Business 2015 report India was ranked 142 out of 189 economies for its ease of doing business.

“Not all companies in the West are in the pink of health and their own home markets have slowed down, so they are also driven by their own appetite,” she added.

Defence, renewable energy, roads, ports, railways, insurance, manufacturing and the proposed 100 smart cities, all offer rich opportunities for non-Indian companies, she said.

Even Narendra Modi’s Swachh Bharat Abhiyan campaign (Clean India Mission) offered great opportunities to foreign players, she said.  “Yes it is about building toilets, but it is also about sewage and sewage management.  That is a huge possible area of investment for companies around the world when it comes to equipment and technology. Smart cities offer great opportunities for investment in infrastructure, building sewage plants, urban design and so on,” she added.

Modi first announced plans to build 100 smart cities in India in his July 2014 budget and $1.2 billion was allocated for them.

Some of the smart cities along the Delhi-Mumbai Industrial Corridor were already receiving support from Japanese funds, Kidwai pointed out. The US has agreed to help fund three of them.

“For the first time, 100 per cent FDI has been allowed in the railways sector and in particular investing in renewable energy to power it,” she pointed out. The state-owned enterprise that runs the country’s train network Indian Railways plans to set up one GW of solar power capacity over the next few years.

“Government targets for renewable energy are huge so it offers great opportunities for foreign companies,” she said.

She said there has not been much interest from foreign companies in the defence and insurance sectors in India yet, but that was because it was too early as the easing of restrictions on FDI  in both had only recently been announced.

“Insurance companies will definitely see more inflows of money because many of the foreign players have agreements with their domestic partners that they will increase their stake  currently capped at 26 percent. When it comes to defence it’s capped at 49 per cent so companies will have to find a domestic partner,” she added.

So when will the investment cycle pick up? “Once the capacity utilisation goes up from 75 per cent to 90 or 100 per cent, we will see the investment cycle revive, but we are already seeing investment going up in the public sector – with companies like NTPC Limited and oil and gas companies. Public sector spending will fuel growth largely via infrastructure spending,” she said.

She said public sector banks in India had seen significant changes. But she admitted that “non-performing assets (NPAs)” were high. “They are beginning to come down. It’s been an issue connected to  projects that were stuck or delayed. In many cases they were delayed because of a shortage of coal when coal supply was shut off because all mining in India halted  – now those projects have been restarted,” she added.

Commenting on why, despite the Reserve Bank of India making three cuts to the repo rate since January 2015, few Indian banks had cut their interest rates, she said:  “As long as the banks have very high NPAs that has an impact on their bottom line, so it’s hard to envisage interest rate cuts will be passed on to customers, though some are coming through. They have very high cost deposits on their balance sheets. Once deposit rates drop, it’s only time before it translates to lower interest rates.”

Bank credit growth too dropped to a 19-year low in April which traditionally was growing at two and a half times the growth of GDP.

“The investment cycle is driven by capacity utilisation which has dropped, so this [drop in bank credit growth] is linked to that,” Kidwai said. “Exports have dropped. Companies are not borrowing as much. India’s dependence on exports to Western markets has been affected by the slowdown in Europe, which is why India is looking more at the East for its exports. China for example is not a major importer of Indian goods, so there is a trade imbalance,” she added.

She said the success of ‘Make in India’ [an initiative by the Government of India to encourage companies to manufacture their products in India] was tied to the relative ease or not of doing business in India.  “Foreign companies are cautious but they need conviction that it’s a different India they are investing in and they need reassurance that investment is happening in infrastructure and their goods are not going to get held up on clogged trading routes – and that will only happen once the large projects that have been announced do take off,” she added.

Two major Bills proposed by the Modi Government have not made it through India’s parliament yet. Both the Goods and Services Tax (GST) Bill and the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Bill 2015 (known as the Land Bill 2015) have been referred to parliamentary select committees after they faced opposition in the upper house of  India’s parliament. The GST would create a single nationwide goods and services tax replacing the layers of central and state taxes that currently exist.

Kidwai said she was confident the GST Bill, earmarked for implementation in April 2016, would get through.

“GST will come through because the former Government had signed off on it, though it might get tweaked at the edges,” she said.

But she said there were fears the tax would be as high as 27 per cent, which would not be popular with consumers.

“The Land Bill is facing much more political opposition and will face a much tougher passage,” she said.

Roads and railways were among the projects now exempt from the Land Bill which meant land could be acquired for both.

She concluded by saying that HSBC India would continue to focus on its traditional areas of corporate banking and global markets in India where it was a major player.

“We are not a major player in retail banking in India. We only have 50 branches – curtailed by Government legislation – but we are a major player for NRI (non resident Indian) inflows,” she added.

HE Mr Ranjan Mathai, Indian High Commissioner to the UK, far left, Michael Lawrence, CEO of Asia House, centre and Naina Lal Kidwai, chairman of HSBC India and director of HSBC Asia Pacific, right, at a briefing held at Asia House

The interview was preceded by a private briefing for corporate members at which HE Mr Ranjan Mathai, the Indian High Commissioner to the UK and Naina Lal Kidwai, briefed corporate members on Modi’s first year in power and the outlook for the Indian economy. Members represented at the table included Diageo, Barclays, HSBC, Nikkei, Rio Tinto, AIG, PwC, KPMG, Lloyds Bank, Prudential and Standard Chartered.

naomi.canton@asiahouse.co.uk

On Friday 12 June Asia House is holding a conference looking at strategies that MNCs employ in ASEAN in partnership with KPMG. HE Le Luong Minh, Secretary-General of ASEAN for 2013-2017, will deliver the keynote remarks and Paul Nichols, Seconded Partner at KPMG Singapore, will deliver the introductory remarks. With the deadline for the implementation of the ASEAN Economic Community approaching, opportunities are growing in this fast-growing region. For more information click here. 

To read an analysis by KPMG India CEO Richard Rekhy of Modi’s 2015 Union Budget click here.