FICCI-CoL Roundtable Discussion – Summary
24 June 2014, 16:00 – 17:30 | Guildhall, London
Macroeconomic and Political Context
Despite India’s “tough fiscal problem”, attendees hoped PM Modi might maintain rather than cut the 4.5% budget deficit, claiming that to enact former Finance Minister P Chidambaram’s call for an immediate spending reduction would risk short-term growth and pointing out that, by global standards, India’s shortfall remained “comfortable”. Rising inward investment and ore exports, moreover, might offset public expenditure whilst coal purchases, although high, could be curtailed by environmental concerns. It would nevertheless fall upon Finance Minister Arun Jaitley’s inaugural Budget to set the economic tone for the new administration, and there was much speculation as to what might be included, ranging from structural changes to the Ministry of Finance to, potentially, some progress toward raising the cap on foreign ownership of domestic insurers to 49%.
PM Modi’s political capacity to oversee such reform is unquestionable, however, and delegates thought he had begun to centralise power by appointing ministerial secretaries directly, hand-picking a smaller cabinet than his predecessor and seeking to remove the “old guard” from India’s bureaucracy. Necessary reforms dependent upon federal-state relations, e.g. the rewriting of labour laws, might also benefit from both the increased power of the executive – “states do not want to be on the wrong side of a strong centre” – and Modi’s experience as Chief Minister of Gujarat. Greater attention should also be given to the fact that “every day there are five, ten steps in opening up that no-one notices but have a big impact”, such as the recent increase in rail fares – a “radical change from the past” and an important statement of intent.
Belief in a prospective “wall of money” waiting to flood the economy remained high, it was claimed, though actual investment had so far been concentrated among investors, such as GSK and Diageo, already present in India and determined to expand their operations there. Efforts to simplify FDI regulations were welcome, however, including streamlined registration procedures and SEBI’s recent reclassification of investment in less than 10% of a company’s listed stock as FPI and in more than 10% as FDI (the former subjecting it to lighter regulatory oversight). The RBI’s decision to allow FPIs to hedge currency risk onshore, meanwhile, was a “huge change” likely to result in increased FII participation, not least because it would permit investors to avoid the significant cost of leased lines in Dubai, home of the rupee NDF market. Currently, four exchanges permit investors to take hedging positions of up to $10 million each, though attendees expected to see market consolidation and, eventually, more diversified hedging options.
India’s stock market, meanwhile, was not yet thought to have peaked considering the administration’s desire to reform, restructure and disinvest both good and loss-making public entities; expectations of stronger economic growth; sound corporate underpinnings; and a pipeline of firms intent on seeking an IPO. Public banks might also seek fresh listings considering the Ministry of Finance’s refusal to prop them up and, combined, such activity could rekindle market participation by India’s retail investors (just 2% of India’s population invest in domestic capital markets, reflecting a need to improve financial education and develop new products, especially interest rate derivatives – “the starting point of any healthy capital market”). Reinvigorating long-term financing in India, however, “will take a lot more time”, though attendees thought the City of London’s Corporate Bond Working Group could be of assistance to the new administration. Indeed, one attendee claimed it was “ridiculous” that infrastructure projects were being financed by bank debt alone. All agreed that India’s immediate infrastructure financing needs would be reliant upon Chinese, Japanese or Korean funding, though there existed “good opportunities” for involvement by Britain’s private sector as the market expands. Approval of India’s first REIT, meanwhile, is “just waiting to happen” and “should see the light of day” it was claimed.
Banking Sector Reforms
Attendees praised the “comprehensive” reform proposals set forth in FICCI’s background paper and, especially, its “very constructive” recommendations regarding NPAs. Identified as one of the “big issues” facing India, delegates thought the RBI had “got their hands full” dealing with them, though they were optimistic that momentum was gathering behind the formation of a National Asset Management Company (NAMCO) and claimed it would “not [be] difficult to implement”. Unless the new administration could face down the infrastructure lobby – who remain reluctant to admit to the problem – and resolve troubled loans within in the next three years, however, “nothing was going to happen”. Even if they did, moreover, there was the issue of “then what?”, as delegates feared that, without teeth, any new legislation might simply emulate the weak SARFAESI Act and permit another build-up of NPAs in future.
Faith in Governor Rajan, however, was unanimous, and attendees noted that high domestic approval ratings for the RBI were “a new thing”. His “pragmatic” approach, moreover, would be crucial to ensuring India’s banking sector implements best practice and undergoes consolidation under Modi, both of which were regarded as essential (it was pointed out that the present market capitalisation of ICBC was greater than that of the entire Indian banking sector). Indeed, despite some discussion of Rajan’s recent statement that differentiated banking licences (permitting only certain types of activity, e.g. wholesale banking) would be available “on tap”, delegates thought it more pressing that the economy be served by bigger, better capitalised banks and heralded SBI’s absorption of five of its associates as the beginning of this process. It was claimed that this was the area in which London had a “big opportunity” to establish itself as a long-term economic partner in India, though prospective foreign participants were reminded that priority sector lending privileges are dependent upon raising capital locally.
It is “too early”, meanwhile, to hope for implementation of the Financial Sector Legislative Reform Commission’s (FSLRC) proposals regarding regulatory reform considering the more pressing issue of the government’s first Budget, though delegates thought the report’s conclusions, although sweeping, “will see the light of day” under Modi. European regulation (specifically AIFMD and Solvency II) was of increasing concern to Indian firms, however, with particular exception taken by insurers to the problem of forced subsidiarisation. Perceptions of “fortress Europe” were thus growing in India, and it was emphasised that regulators must begin to “open their eyes to the wider world”.
Although widely regarded as a “bellweather of progress”, India’s retail sector (especially it’s multi-brand FDI regulation) is unlikely to be liberalised in the near future, though delegates regarded this as “not so significant” and emphasised that markets look to Modi’s financial reforms first. Progress on the Goods and Services Tax, meanwhile, had so far been “good”, and its eventual passage – a “tough ask” for 2015 but “a given” for 2016 – is expected to add 1.5-2% to GDP.
 Whether included in Jaitley’s first Budget or not, delegates were adamant the cap “will go to 49%” under the Modi administration.
With the caveat that a purchase could be structured so that multiple individuals investors held a 9.9% stake in a firm to qualify for FPI status so long as overall foreign ownership – “a different issue” – remained below 100%.