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    Economic case for investment cycle to begin is now: JP Morgan Chase India CEO Madhav Kalyan

    Synopsis

    Madhav Kalyan, CEO, JPMorgan Chase Bank India, says that the conventional ways of looking at data won’t help.

    JP-Morgan-Chase-Bank-India-CEO-MAdhav

    Madhav Kalyan, CEO, JPMorgan Chase Bank India, said that long-term investors like MNCs are coming to emerging markets in a more sustained manner,

    Investments are sluggish is the usual complaint even as the economy is growing at nearly 7%. What is it that analysts and commentators are missing? Madhav Kalyan, CEO, JPMorgan Chase Bank India, says that the conventional ways of looking at data won’t help. Edited excerpts: Global trade and markets are in a state of uncertainty.

    What are you picking up from your clients?
    We work with multinational companies, which are significantly increasing their investments in Asia. MNCs see opportunities in two Asian sub-regions: Greater China and the Indo-Pacific region, that includes India and the ASEAN (Association of South East Asian Nations).

    MNCs investing in Asia see these countries as high growth and high potential markets. A one-country conversation is never an optimal one.

    Rather than showcasing a single country solution for investments or working capital optimisation or currency risk management solutions, we are now showing these across a group of seven countries.

    Trade between India and ASEAN has been registering strong growth. The government and Prime Minister Modi have also been paying particular attention to the partnership and this corridor has really taken off well from 2015.

    But aren’t the emerging markets as a group losing sheen now?
    I would not think so. Long-term investors like MNCs are coming to emerging markets in a more sustained manner, because there is huge potential in these markets – high GDP, long-term double-digit growth potential for their own companies, young demography, increased focus on improving ease of doing business, committed workforce.

    How do we look at capital outflows?
    Portfolio investors on the other hand are re-balancing depending on where equity and bond markets are doing better. The relative value at different points of time is different.

    For example, if US interest rates go up, the risk adjusted returns in developed markets are temporarily better compared to emerging markets. Again, if they see value in EMs, these flows return. Such kind of investment flows will keep rebalancing and fluctuating.

    Make-in-India campaign was aimed at drawing global investments. Are investors buying it?
    Ever since the ‘Make-in-India’ programme combined with the ‘Ease of Doing Business’ initiative was kicked off, we have seen MNCs take many positive steps to harness the potential of the programme. The first step in the process of making in India is moving from solely importing to setting up assembly facilities in India. Over time, global vendors also build their facilities and the manufacturing ecosystem develops gradually to full-scale manufacturing.

    But what’s happening on the ground?
    We see many MNCs taking the first step of setting up assembly plants and facilities. What has also aided the Make-in-India programme is that we have created a duty differential, which discourages import of finished products and creates an economic rationale for importing kits and assembling them in facilities that create local employment and opportunities for local vendorisation over time.

    Are there examples?
    Take the example of the mobile industry. There are 10-12 players. That is about a Rs 1-lakh crore industry. Four years ago, it was completely importbased.

    Now, most of the companies have assembly facilities in India and are scaling up. Over time, these will turn into full-fledged manufacturing facilities. There are many more examples in the auto industry, where more models are made from the Indian facilities of the global auto majors.

    We see a similar trend in the MNC pharmaceutical industry as well. The interface between RBI and the Customs for processing imports and exports digitally with minimal paperwork is one of the best initiatives that has made cross-border trade easier to process and has very positive feedback from our MNC client base.

    Were we misreading multinationals’ investments?
    Traditionally, we look for growth from three data points – FDI flows, growth in profits of the listed companies, credit growth in the banking system. For MNCs, most of these metrics do not accurately reflect the underlying investments or robustness of this segment.

    MNCs tend not to borrow from the Indian banking system and, hence, do not reflect in credit growth numbers. They also use inter-company external commercial borrowings from their parent companies to fund capex, rather than bring in money as permanent capital or FDI.

    Most of them are not listed on our domestic exchanges and their profitability details are not available in the public domain or available with a considerable time lag through the MCA filings. We need to develop a better set of metrics to be able to track the collective MNC investments, which we see as strong, based on the companies we engage with.

    What about local investments? Are we running out of excess capacity when interest rates are climbing?
    Public investments continue to be government-led, which is in road projects, railway projects, urban metros, etc. For private sector investments, there are a few enabling factors that are required.

    Firstly, the economic case for investing has traditionally kicked in when present capacities operate at around 80% levels. Capacity utilisations are in the high seventies now and that gives us optimism that there will be a rationale for the investment cycle to restart soon.

    Second, capacities are getting released through the NCLT process and buyers are finding value in acquiring capacities and putting them to productive use rather than building incremental greenfield capacity. This in itself will kickstart the modernisation process of the acquired assets. There will also be a subsequent round of brownfield capacity expansion in those acquired assets.

    With banks’ poor health, how does the capacity get funded?

    Financing is the other element needed to enable the private sector investment cycle. Even as the domestic banking system resolves historical issues through the NCLT and other resolution mechanisms, we do not see capital as a constraint for right projects.

    Apart from the traditional source of loans from domestic banks, Indian companies now have access to and are well recognised in international loan and bond markets. Many more Indian companies are now internationally rated and global bond investors are now comfortable with over 30 issuers coming out of India.

    A case in point that proves this is the funding strategy used by the renewable energy industry for its capacity expansion over the last three years. The players in the renewal energy space have used a mix of private equity, international bonds, domestic bonds apart from domestic bank project finance.

    Are overseas loans becoming more popular than offshore bonds for Indian companies?
    Yes. Right now, the international syndicated loan markets are offering better value to Indian companies rather than the bond markets. Even as spreads are widening for the emerging market issuers in the bond market, there is a lot of capital available in loans from international banks which have interest in India. Many Asian banks are active participants as it helps build business relations with Indian companies.

    Many Korean, Japanese, Chinese banks are also setting up branches locally and see international loan participations as an opportunity to do more business with Indian corporates. Consequently, loan pricing tends to be finer than bond markets, given the potential of a wider relationship leading to additional revenue opportunities.
    The Economic Times

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