• NOVEMBER 30, 2001

ďIf we can work out a long-term strategy, the growth prospects are greatÖĒ

Mahesh Vyas began his professional career as a research assistant with Centre for Monitoring Indian Economy (CMIE) in 1980. He did his graduation in science and post graduation in Economics & Statistics. He then moved to International Economics to research the economics of East Asia and China between 1982 and 1985. Besides, he has worked on several sectoral studies and developed new systems at the CMIE.

In an interview with Equitymaster, Mr. Mahesh Vyas, Executive Director, CMIE, shared his views on various challenges and growth opportunities ahead of us. He also shared his vision for the Indian economy.

EQTM: Please could you share with us your views on the global economy and their impact on India's growth prospects?

Mr. Vyas: There are lots of uncertainties on both fronts, on the global economic growth front as well on the Indian economy front. We have seen some unfortunate events, like the September 11th attacks and the Afghanistan war. There are fears of there being problems in the economy, in general as well. So, certainly these are times of lot of uncertainty and lot of gloom. In India we have had a very troublesome period. Domestic consumption demand has been very low and investments have been extremely low for a very long period of time. Consumption expenditure demand has some hope of recovery because of a good monsoon this year but thatís a small saving grace. The underlying uncertainty or the underlying fear of a continuation in slowdown persists.

EQTM: There seems to be Ďcautious optimismí regarding India's economic performance largely due to an anticipated boom in agricultural output. How do you see that benefiting the economy as well as the corporate sector?

Mr. Vyas: A good monsoon followed by a good crop and a good farm income is certainly good news for the corporate sector. But one has to take this one set at a time. So we have had only one good crop season i.e. a kharif season and we have to wait for the rabi season to be good and the next one to be good to be sure that the farmers will spend more on industrial goods and services. There is some amount of pickup that is already seen in some sectors but we need this to sustain for longer for it to really benefit the corporate sector significantly.

EQTM: What in your view is the sustainable level of growth for the Indian Economy? In order to jump to a higher level of growth what would be the key inputs required?

Mr. Vyas: Sustainable growth rate is interpreted as what will be the growth rate that will not lead to run away inflation. If there is huge pump priming, lots of money pushed into the economy then inflation can rise. Growth will come at a cost of inflation. That is called as an unsustainable growth rate. Right now inflation is not the major issue, not the problem. So, it is not a question of what is a sustainable growth rate. It is a question of what is going to be the growth rate. There are problems the economy faces and it does not look like that pump priming is going to help in a big way. And pump priming is also out of fashion. So one will not do it the whole hog. There are basically uncertainties that the economy faces in the new economic environment. The dependence upon the monsoon to see sustained growth is a vital factor.

EQTM: The Reserve Bank of India, in an unprecedented move in October, cut the Cash Reserve Ratio by 200 basis points. Although this has triggered off a rally in the G-Sec market, lending rates for the non-government sector have not responded to such an extent. Would you attribute this to the over hang of government borrowing programme? Any other reasons?

Mr. Vyas: No, the RBIís policy, which was announced recently, is the continuation of the policy that it has been having for the past several years now. Ever since Dr. Bimal Jalan took over as the Governor, he has been continuously and consistently talking of importance of growth. From his part, the contribution is that he will ensure that there is sufficient liquidity and the exchange rate will not be volatile. So he worries only about the volatility of the exchange rate and for that he ensures that there is sufficient liquidity in the system and even tries to crop the interest rate down. So the emphasis is very consistent that we need to worry about growth. And it makes sense because inflation is down. What matters is really how fast we can grow.

The problem is that the reduction in the bank rate in the last one-year or so is not translating into a reduction in the lending rate. That is because the banks themselves are finding it difficult to reduce the lending rate and they donít think reducing rate will increase offtake. This is because there is no demand from the investors. So it is not that the corporate sector is stuck because of high interest rates. That certainly is not the case. The corporate sector is not stuck because of lack of liquidity. There is enough money floating around. There is money floating at reasonably low interest rates and the long-term perception is one of lower interest rates. So, certainly it is not finance or the cost of finance, which is an issue.

EQTM: You said that investments are not taking place in the economy. What do you think is the detrimental factor? Why investments are not taking place?

Mr. Vyas: The entrepreneurs have already invested a lot and have done it extremely inefficiently. This has led to their asset utilisation ratios being pathetically low and, to a large extent, a lot of non-performing assets have been created. They have lost their credibility with the banking sector as well as with the IPO investors. So it is not the cost of money or the availability of it but it is the credibility, which is damaged to a large extent in the Indian corporate sector. But it is not true for all of them.

The other problem is that there are fears of imports coming in a large way and the unpreparedness of the Indian corporate sector to face the competition from cheaper imports. And imports are only going to get cheaper. They are going to get majorly cheaper. Only if you can withstand such global competition, can you survive. The statement that comes across from the Indian corporates is that they are not sure they can compete. So they are not willing to put any more money. So it is not that the government is not implementing reforms, it is all nonsense. The government is not to be blamed for lack of investments. It is the private enterprise that we need to look for. They are the ones who can handsomely grow into becoming globally competitive giants. Otherwise, investments can be done in all sectors so long as they are globally competitive.

EQTM: How do you see the manufacturing sector performing in the coming years? Do you feel that we will be able to compete given that the superiority the competitors have in terms of technology?

Mr. Vyas: It is not only about technology. It is about the entire supply chain management. And I donít see any reason why we should not be able to compete. We certainly can compete. It is a matter of changing the mindset. From knowing how to set up goods here, selling it at the next door at a bargain price to actually managing the entire supply chain. Thatís a much larger and a far more complicated task to do. So those companies, which donít look for sops from the government, those who donít keep crying over imports, those who talk of becoming globally competitive and exporting in a big way, will be the winners. We have them in the manufacturing sector as well currently.

So it is question of mindset, it is a question of vision and it is the question of management expertise. We have to look at things that we have. We have to look into what we can do. We have opportunities, we have a lot of natural resources and a big market. If the multinationals are eyeing our market, we should eye it as well.

We have got profits too easily in the past. Even now, there are lots of manufacturers and manufacturers associations, which believe in collusive behavior and not in competitive behavior. If you have such a narrow vision that we want some way of stopping prices from falling and some way of stopping consumers to get the benefit, that is a guarantee that we canít become globally competitive. If we want to be globally competitive, we should be able to see prices going down. Look at the computer industry. The prices are much lower than they were 15 years ago. All the computer companies have money. Or atleast those who dreamt of becoming globally competitive have made enormous money. That is the way an industry needs to grow. Not by saying, you see what my cost of production is, then you give me a mark-up and I should get this price, thatís nonsense. You can never grow if you look at the cost-plus way of working. You need to get that mindset away and move to say that my margins have to come down and my volumes have to grow.

EQTM: The disinvestment programme of the government finally seems to be spluttering to life. What impact will successful disinvestment have on the economy? Also, how would you like the government to handle the entire exercise?

Mr. Vyas: The first thing I must say is that we have a very credible minister in charge of disinvestment. That is a first reassuring factor. The progress has been slow but the progress is certainly better this year than in the recent past. We have seen some disinvestment happen and there are efforts to disinvest more. It appears that the process is a lot more complicated than to merely announce a disinvestment. I think there are difficulties but I think the government is making some progress.

I donít think this is such a greatly important thing for the country to do. In a sense it is good to do it. But it is not like if you donít do this, the sky will fall on our head or reforms will come to a standstill or the government will be blamed for being inept or inactive. There are many more things that are far more important than disinvestment.

EQTM: What are those important things?

Mr. Vyas: Expenditure reforms, PSU enterprises reforms, SEM reforms and streamlining the entire tax rates. This is for the government to do. And to ensure that in all the infrastructure sectors, reasonably independent or rather completely independent credible regulatory authorities are set up, who are not governed by the department but by their own systems. I would like to see, like there is a RBI, which governs the banks, there is SEBI that governs the capital markets, there should be a similar independent authority, which should govern like say, the power and telecom sectors. So there is no movement over there and I donít think that is less important than disinvestment.

EQTM: Subsidies are another issue, which our politicians have failed to tackle effectively. How would you look at controlling the subsidy bill and at the same time ensure that the poor continue to benefit from the same?

Mr. Vyas: I donít think subsidies are such a terrible thing. You require to give subsidies, you require to give subsidies to the poor. We should only correct the misdirected aspect of it. We need to correct that and we should not cut down subsidies. It is a mismanaged expenditure. It is certainly not a burden. I would say that there are many sectors that require to be subsidized. We require a cohesive and a peaceful society. It is cutting down wasteful expenditure. And there is huge amount of wasteful expenditure that happens through the government. Each senior officer has a very large number of people working under him who largely have no work. So it is all about expenditure reforms. That is more important than cutting down Jawaharlal Rojgar Yojna that creates employment. We should utilise the money properly and ensure that there are less leakages. We need government to be involved in this activity. It canít retreat.

EQTM: Coming to foreign flows, both direct and portfolio, how do you see India performing on this front in the coming years? Will ĎEnroní have an impact on direct flows?

Mr. Vyas: FDI will continue independent of Enron. Enron has not affected anybodyís sentiment excepting those quarters, which would have liked to invest exactly like Enron invested. If you have good governance, you certainly will get good investments. If you have bad governance in the past, then it could have brought in bad investments. Now where does Enron lie in this spectrum of good and bad is upto the reader to decide. But I donít think that the Enron episode is going to affect investment.

Investments are already coming in. So many of those foreign multinational held companies are de-listing and are aggressively being pursued by FDI. So there is FDI. Take telecommunications, there is a huge amount of FDI. Take Insurance, there is some amount of FDI coming. I am sure there will be more in the coming years. If demand perks up, it will be even more. If there is good governance, both on the part of the government and from the part of the entrepreneurs, I think there will be substantial or sufficient flowing into the country. Mind you, there is no dearth of funding for investors. Banks have got enough money to fund whomsoever want to set up a plant. So what is required is a project.

EQTM: Please share with us your vision for the Indian Economy. What do we need to do to reach there?

Mr. Vyas: I think there is tremendous potential. It is upto us to make the best of the potential. If we can put our act together and work out a long-term strategy, the growth prospects are fantastic. But if I go the long-term historical trend, we have an uncanny capability of losing opportunities and getting too carried away by some small nonsense issues. If we can have a long-term strategy for growth, we can grow at a fantastic rate.

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