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.
Participation
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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