Global perception of India as an investment destination has improved: Rana Kapoor

As the Narendra Modi Government completes one year in office, how does the industry view its performance on various fronts?Rana Kapoor, MD & CEO, YES Bank and President, ASSOCHAM,says the government has been able to take decisive steps on many fronts to revive the economy, although it may take another year to see the results on the ground, in an e-mail interview with MG Arun.

Q: What is your general impression on one year of Modi government?
A: Armed with a comprehensive mandate, the Government under the leadership of Prime Minister Narendra Modi has taken decisive steps on many fronts to revive the economy, revitalise the bureaucracy, boost inclusive growth and improve the global perception of India as an investment destination.

Significantly, Modi's dynamic and proactive foreign policy initiatives, right from inviting all SAARC leaders to his swearing in ceremony, to his efforts to reach out to key economic giants including the US, China, Russia, Germany and France were much-needed interventions to boost India's image in the global economy. I am sure that the Indian economy will benefit greatly from the change in sentiment and renewed business, trade and cultural ties with these countries.

The euphoria which fuelled stock markets to unprecedented heights, is now giving way to a sense of realism; however it remains one of hope of sustained and focused reforms. Economic stability has returned, inflation has been reined in and the global cues also have turned positive in India's favour. While there still is some way to go in terms of big ticket reforms like GST (Goods and Services Tax) and land acquisition, the action taken so far in terms of opening up FDI in key sectors, transparent auction of coal blocks, new gas supply mechanism, renewed focus on renewable energy, single window clearance and promoting financial inclusion are extremely encouraging.

However, we are talking about a large and complex economy. There is focus on the right areas and work on structurally improving process is going on. It is reasonable to expect that it will take another year before we actually see the impact on the ground.

Q: What, according to you, were the most impactful steps taken by the government to boost the economy? Do you think these steps have achieved the desired results?
A: As a governance and development driven captain, Modi has already demonstrated a highly effective blueprint for governance reforms by creating a modern and efficient administration which is focused on 'Smart Governance'

In its first year, the NDA government has set up a number of key flagship schemes directly under the guidance of the Prime Minister, the most notable of which are the 'Make in India', 'Skill India' and 'Digital India' initiatives. These highly strategic programmes, along with the focus on the JAM Trinity (Jan Dhan, Aadhar & Mobile) are envisaged to be the foundation of long-term growth.

In my opinion, 'Make in India' and domestic manufacturing are the central pillars of the government's focus on job creation through revival of growth and investment. I am confident that the government's progressive stance towards reviving investor confidence through policy interventions in key sectors such as infrastructure, aviation, automotive, manufacturing, defence, renewable energy, pharmaceuticals, amongst others, is a critical step to position India as the number one investment destination globally

What stands out, in my opinion, is the marked shift in the way the government machinery functions, the sense of accountability of the bureaucracy and efforts aimed at doing away with red tape and improving 'ease of doing business' are commendable.

Q: The past one year has been helped by falling oil prices. How could the situation change, now that oil prices are climbing, and the rupee is becoming weaker?
A: While oil prices have climbed up over the last two months on the back of geopolitical concerns, one needs to appreciate that fundamental factors like a slowing Chinese economy, persistence of supply glut, gradual progress on the Iran deal, and a relatively strong dollar, continue to impart a downward bias to prices.

The Indian rupee has weakened by under 1% since the beginning of 2015. This is a marginal and a desirable adjustment to preserve competitiveness from the fundamental perspective of India's trade weighted inflation differential. With inflation under control and India's FX Reserves touching record high levels of $ 352 billion, I don't see room for a substantial sustained level of depreciation.

Nevertheless, India's policymakers need to further safeguard against unpredictable financial market volatility by accelerating the domestic macro enhancement process.

Q: The stock markets have been highly volatile, and have fallen drastically in the past few weeks. Are the sentiments reflective of the concerns about lack of reforms and sluggish growth?
A: Indeed, the Indian stock market after surging by close to 25 per cent in FY15 has slipped by nearly 6 per cent since mid-April. However, this recent downside in domestic markets has been in consonance with moves in global equity markets in both emerging and advanced economies. The trigger has come from a sharp selloff in bond markets on the back of Fed Chairperson Yellen's comments and rising crude prices, which has forced investors to shed riskier assets globally. Having said so, in my view, the recovery in Indian economy remains on track led by incremental reforms and policy action. While a slower than anticipated pace of reforms may have disappointed some stakeholders, one must not overlook the fact that reforms are heading in the right direction and most macroeconomic indicators - growth, inflation, external account are in better shape than a year ago. In my opinion, the current decline should not be construed as a reflection of concern on domestic growth potential, but rather as a phase of consolidation.

Q: Do you think weak government spending has weakened demand and in turn, hurt the economy? Already some corporates have been reporting weak earnings.
A: Government has been consolidating its spending since FY14 with the larger aim of correcting macro-economic imbalances via fiscal prudence. High government revenue expenditure was one of the key factors contributing towards high inflation and elevated current account deficit in the recent past. Hence consolidation of government spending especially on revenue side should be viewed as an enabler for improvement in the growth-inflation mix in the economy.

In FY16, the government has budgeted for a significant improvement in capital expenditure mix. The 34 per cent increase in plan capital spending is already yielding results in key sectors such as power, roads, railways, smart cities among others. This should allow an investment led revival in consumption demand to take root.

As the impact of government's capex spending and policy impetus plays out, economic growth dynamics will begin to improve leading to improved corporate sector performance. I expect corporate sector performance to show marked improvement from H2FY16 onwards supported by lagged impact of government's reform push, reduction in bottlenecks through ease of doing business, lower interest rates owing to low and stable inflation and healthy external sector environment.

Q: Manufacturing's growth is still in single digits, while exports have been lacklustre. Do you think the government has been able to take any clear steps to boost up the sector and exports?
A: The government has put in place a long term strategy for manufacturing and manufacturing exports, which so far was lacking in the Indian economy. The 'Make in India' initiative aims to facilitate investments, foster innovation and build the best in class infrastructure. Further, the government also unveiled the Foreign Trade Policy for 2015-19, with the intention to boost exports and align India's trade policy with the Make in India vision. The focus of the government has been to improve the ease of doing business, simplify schemes and correct the inverted duty structures. The Modi government should be lauded for successfully establishing a common economic agenda running across key policies over the last one year, with an aim to promote manufacturing growth . The benefits of these reforms should begin to manifest with a lag now in FY16. Further, the recent depreciation in rupee should help to improve competitiveness of Indian exports, in a global economy that is expected to grow only as much as last year.