Pradip Shah, chairman IndAsia Fund Advisors, believes that while India?s economy is slowing down, foreign investors will come back because there is an opportunity here. In the meantime, Shah tells Shobhana Subramanian, the government needs to reform the power sector, curb gold imports and ease shareholding controls in private sector banks.
The rupee has seen a very sharp fall?
The governor?s statement to the effect that RBI had not intervened but may intervene any time was a good move because, otherwise, the speculators were getting a free ride. Look at the way other nations have handled a sharp movement in currency; Japan has intervened once in a while, though this may have meant a huge burden on them, Switzerland has also done this, though it may have meant a loss to them. But by teaching the speculators a lesson, they unnerve the speculators.
Is the rupee overvalued?
Yes, I think the rupee is overvalued because of the deterioration in competitiveness. Unfortunately, in India, we have had galloping wages and commodities but have not been able to make up in terms of productivity gains. We have not seen an adequate productivity improvement from infrastructure. As a consequence, we have lost some of our competitiveness. Take the garments industry; in Vietnam, I?m told a worker gets R1,200 whereas a worker gets R6,000 in India, so how can we be competitive? Had we improved productivity, we could have absorbed the wage costs.
So should the rupee be allowed to depreciate?
Yes, but when there is sudden depreciation, that unnerves the market and doesn?t allow for orderly capacity build-up by companies to meet the new currency valuation. But companies have been complacent, too; When you have borrowed $30 billion through ECBs, you are vulnerable. Also, natural hedges are not always enough and effective because your customers come back to renegotiate and you are not able to pass on the currency losses. But those who have not hedged or were not prudent, will have to bear the brunt of it.
Do you have any visibility on the global economy?
There is now the real danger of the global economy slipping into a recession. There are the $1.3 trillion dollars of cuts in the US and there is the possibility of a disruption of the eurozone. Greece is a minor problem, but Italy is a major problem and Spain in an emerging one; but they can be saved because the eurozone in aggregate is not overly indebted. The world is a dollar bull for the time being, but over the longer term, where is the dollar?s strength going to come from? Americans have several liabilities, like medicare, so they will cheapen the currency, which has been their conscious strategy, and have an export-led manufacturing growth in their domestic economy.
So, where do you see the rupee headed?
The rupee has been held up mainly on foreign currency inflows. On the fundamentals, on the trade and current accounts, we have seen a deficit for the last few years. Fortunately, our invisibles have been holding up. In the immediate future, the capital inflows cannot be counted upon because of risk aversion in the eurozone. We should consciously market ourselves to some capital surplus countries like Japan from where we have seen a trickle but, if we do a good job of selling ourselves, we can see a flood. They have a strong yen and a very low cost of yen. Their companies are large and are looking for markets and since they have enough of an exposure in China, they have to look at something like India because western economies are not giving them enough. If we position ourselves, not just fiscally but holistically, it can be done quite rapidly, the idea being that we become a hospitable country for Japanese investment.
In spite of our anaemic growth this year, we will grow at 6.9-7%. I think we will attract money in the long run because we have the entrepreneurship and the wherewithal?unless we have complete chaos in terms of law and order. Unfortunately, the leadership has not been proactive at all and that can only be to their disadvantage. FDI in retail or in aviation is on the periphery and although this may be economically right, it may not work in their favour politically because they would be seen to be favouring their cronies?that?s the tragedy and it?s because they waited so long to act and were forced into it because of a crisis.
You have been saying we need to curb gold imports?
In the first six months of this year, we saw some $31 billion of gold and silver imports. That?s more than the current account deficit. Not only does this cause a strain on the currency, it is also an unproductive investment and hoarding does not add value to our system. And it?s all because our customs duty is so low. So, if we raise it to, say, 10% ad valorem, it may not encourage smuggling, because that margin then may not be good enough for smugglers and, at the same time, it will discourage consumption. This would be so easy to implement. There are also other liberal provisions that need to be done away with because the currency sliding doesn?t help us with our fiscal deficit. If we can have a controlled glide path for the currency, that would be so much better; we can weaken it if we need to.
How are foreign investors viewing India just now?
On the whole, foreigners have been kinder to India than we have; we see much more of the warts. The big institutions say we have to be in India, sooner or later. There is the current crisis but, historically, India has had relatively smooth political transitions and political stability and so it will come back to the golden mean. So, they?re saying it may not be time to buy now but when it becomes cheaper we can buy. Anyway, the currency becoming cheaper is helping those who haven?t invested. But money will come back and it requires good leadership to bring it back faster and in larger amounts. Today, so many projects are not going to be funded because they were relying on capital flows.
What do you make of the government?s new disinvestment strategy?
It is a way of meeting the fiscal deficit optically and I think in some ways it is important for the government to be disciplined in meeting the target, otherwise there will be no confidence in government budgeting and that will be worse. So, disinvestment should be done in a way that is good for minority shareholders. If Coal India is going to be asked to put in, say, R12,000 crore into ONGC?s equity, will Coal India get a return? What is the price at which ONGC will sell? The government will have to make concessions on the price so that shareholders get better returns. They will also have to keep in mind synergies; like if OIL buys, say, Indian Oil, again so that there can be some good value addition for shareholders. As for SUUTI, we missed out on the best price but there is still a lot of value there. But it makes no sense for SUUTI to be sitting on ITC; there is no strategic value in this, so get out of it. As for Axis Bank, even if the price has come off, a large block of that kind is very valuable and there is no harm in exploring strategic buyers; people will pay a fancy price for the stake.
Does the government need to open up more sectors?
The artificial restrictive limit of 5% on bank holdings needs to be reviewed. I don?t see any logic in this when public sector banks account for a substantial part of the banking industry; there is no reason to continue to limit stakes in other banks. Why should the government have so many banks? If LIC wants Corporation Bank, give it away. I don?t think the union pressures are so great that they do not have the freedom to do these things. It?s the political will that?s lacking, so they need to create the environment, educate the opposition and the public that it is the right move. They will have to do the same thing for aviation because, although allowing FDI is the right move, they will be criticised not just by the opposition but also the public and media, that they are doing this for their cronies, because their move now seems so untimely in many ways because they didn?t talk of FDI when Air India was in trouble.
Do you see the capex cycle turning?
Our interest rates have been hiked so many times, and they are too high. We will have two years of slow growth, so now, to begin with, RBI needs to pause so that there is no psychological concern. Also, they have to get the central government to move on fiscal measures and address the supply side issues. At these interest rates, corporates will be wary because credit is unaffordable and project finance is at 15%. Capital goods companies are flooded with goods that have not been lifted by clients. We have a major problem in the power sector because of the subsidies from state governments to customers, as a consequence of which their discoms don?t have the funds to buy power. So we have had to back down on low-cost power. And we have power cuts in a city like Hyderabad from 8 am to 3 pm! The government should enforce a policy that power must be available 24X7 so that state governments give fair pricing to the consumers, with a little cross-subsidising at the margin. State governments need to give explicit subsidies.
Are rising NPAs of banks a big concern?
I?m less worried about the SEBs because, at the end of the day, state governments do have taxing power and they have assets. What is worrying is the large debt of the corporate sector, like in the infrastructure space,where the net debt to equity is high. And the current environment of high interest rates and the slowdown could aggravate the problem.