Sunday, August 16, 2015

India’s Growth Potential: Sky is the Limit but Stock is the Ceiling?

A few intriguing data sets speak volumes about the growth potential of India, a huge nation of 125 crore (1.25 billion) people. The first is that in 2014-15, airlines in India carried 823 crore passengers which is nearly 100 times more than 871 lakh passengers carried by the Indian railways. This is counterintuitive given that huge sections of the population cannot afford air travel where typical fares are 50 to 100 times more than rail fares, depending on the type of airline and class of travel. This indicates that it is becoming impossible to secure reserved travel on the railways with short lead times even as more people are realizing the time value of money. The question then is whether billions of dollars should be poured into the aviation sector or creating a pan-India network of superfast bullet trains (or possibly on both).

The second is that India has 100 crore telecom subscribers but only 27 crore Internet subscribers.  Less than 50 percent of the households own a television while over 63 percent have telephones. Only 67 percent of households have access to electricity. Given the seamless connectivity that drives communication and entertainment, a completely energized household network may lead to a completely connected and re-wired nation. Less than 50 percent of the households have access to tap water or toilet facilities. Less than 50 percent of the households qualify as per modern building safety standards. For similar population, China has more than 3 times of households than India. These statistics are only a few among a variety of statistics that demonstrate the tremendous growth potential that awaits India.

Enigmatic story  

Any set of numbers relating to India that we may take or any comparison with China or a developed nation clearly outlines the development gap that needs to be bridged viewed in one perspective, and the huge potential that can be achieved if the gap were to be bridged in another perspective.  Much as the Internet and Electronic Commerce are the new waves of growth, India needs to bridge huge gaps in physical infrastructure if the total population needs to be served equitably. This huge need and potential for huge infrastructure contrasts sharply with the travails all the core industries, from steel to cement and from capital goods to power sector, are facing. Unfulfilled demand, therefore, is one aspect but finding sustainable ways to prime all the sectors of the economy for capacity building and fulfilling growth is the other vital aspect.

Import of 2 to 3 million tonnes of steel from China is enough to threaten the Indian steel industry and unnerve the investors in the sector. Similar is the case with the automobile sector which has emerged only now from a multi-year downturn, perhaps the longest trough in its cyclical history. Sugar industry has been facing unviability for years, impacting the farmers. With a highly sensitive and volatile stock market, hyper-anxious investors, uneasy bankers worried about asset quality, and cash-constrained industry, there seems to be very little new choice than continued incrementalism in India’s growth journey, even if the growth rate were to move from 6 to 7 percent to 10 to 12 percent. The hope that foreign direct investment (FDI) would provide the much needed investment is true more in terms of creating jobs rather than transforming India’s industry and infrastructure.

Stock is the ceiling   

While for India sky is the limit for the growth story it looks as if it is the stock market that sets the ceiling. Stock markets are the platforms that can enable companies raise funds based on performance and potential. The Indian stock markets are, however, caught in a vortex of unpredictable foreign portfolio investments and unceasing quest of investors chasing quick returns. With the tendency of promoters limiting public issues to opportune premium pricing moments, the stock markets are more of platforms for reinvesting money in limited stocks rather than attracting new capital for new ventures on a continuing basis. Increasingly, the risk-return game is being played by angel investing and private equity funds in momentum sectors rather than in long term physical structures.

The Government has tried to alleviate the situation by having a mix of stock financing and bond financing for public sector and utility projects. Without bond financing backed by sovereign guarantees certain vital corporations like Rural Electrification Corporation and Power Finance Corporation may not have achieved the current level of capital formation. Nor would have development institutions such as IDBI and SIDBI expanded their capital access in their growth phases. Majority of public and private sector corporations are, however, hamstrung for funds and have to proceed carefully with an eye on a volatile stock market even if sky is the limit for India’s growth. Policy makers as well as market investors have to make a serious choice in terms of generating investments for India’s growth.

Faith, rather than return

India’s growth story can be fulfilled only by investments that are driven by long term faith rather than short term returns. It is difficult to imagine that bullet trains, metro rails or expressways and even steel plants, power utilities or cement works can be established by investments that seek a payback in 5 or 10 years. They cannot also be attracted by providing adjunct corridor lands as incentives for commercialization. India’s growth story can be executed only with faith, an unwavering faith that there is so much growth potential in the country that no investment, as long as it is properly planned and executed, can go wrong. The fact that the Government is able to unlock its huge investments, made several decades ago, in public sector undertakings by marginal stake sales nowadays is proof that value built over the years in right projects would pay back over course of time.

The question for investors is how soon is soon enough and how late is not too late. There are no standard answers to these; pension funds may have a preference for guaranteed even if low belated returns while private equity may continue to bat for quick returns despite very relevant nationalistic and patriotic concerns. In India, nationalized banks and development financial institutions have traditionally played a leading role in funding long gestation projects. However, they do not seem to be as active in this area nowadays as they should be due to the stressed asset situation. The debate is skewed by a compelling need for banks to conform to Basel norms. The one worry in this crucial area of public policy is a lack of proper debate on what constitutes a performing asset and non-performing asset, and the management and governance considerations thereof.

Investing in faith

There is clearly a lack of alignment between policy makers, promoters, managements, banks, financial institutions, private equity investors and general investors on what constitutes the fair gestation period for a fair return in different sectors. There is also lack of alignment on which types of investments are appropriate for which sectors. Rather than focus on just one or two topics, institutions such as NITI AAYOG, CII, ASSOCHAM and FICCI, should develop holistic white papers. The author would like to postulate that private and foreign investments should focus on areas that are market and export intensive, create employment and place greater purchasing power in the hands of general public. These investors should focus on investments that provide a fair return in 5 to 10 years.

The Governments should concentrate on building infrastructure and infrastructure enabling projects which can pay a return only in the medium and long term, say from 10 to 30 years. The fair return would accrue at a faster pace if appropriate user charges which the markets can bear (for example, utility rates, toll charges) are possible. Such higher charges would be feasible if the private and foreign investments spur employment and help society with greater purchasing power. The overall policy would thus have a target well-balanced investment portfolio, with all the investment segments work synergistically. This policy would rest on sound economic fundamentals when the economic structure of each industry is well researched and well-articulated.


Stocks and investments through/for stock markets are just one, albeit powerful, form of generating investments. These are not, however, the right ones for aiming at sky-high investments. As the stock pricing history of certain long lead infrastructure firms in the high days of their public offerings and subsequent euphoric days indicates, such stock prices are fuelled by unrealistic anticipations and tend to fall as rapidly as they rise. Efforts to rely on stock market mechanisms for investment-intensive and long gestation projects could create artificial bubbles too, at grave risk to investors, especially the retail investors. A healthy bond market with sufficient incentives in terms of sovereign guaranteed, tax-free returns could be an alternative platform for public participation. With more focused investment participation driven by sound socio-economic logic, India can achieve multifaceted growth in diverse areas.

Public sector banks and financial institutions would continue to be powerful drivers for enabling infrastructure funding. As the Government is now planning, major contributions from the Government to ensure capital adequacy would be a worthwhile investment to strengthen these institutions and channelize investments into projects of faith through these important institutions. One cannot imagine, for example, the huge enrolment for the Prime Minister’s Jan Dhan Yojna without the drive and structure of public sector banks. Voluntary and mandatory participations from companies under the Corporate Social Responsibility programmes are also making a difference, but could make an even more impactful contribution if they are focussed on few initiatives such as Swachh Bharat Abhiyan and Education for Underprivileged.

Posted by Dr CB Rao on August 16, 2015

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