Punita Kumar Sinha
Expert Board Member and Investment Professional
We are in the 10th anniversary of global financial crisis (of 2008). Is the Indian economy prepared for such a situation?
A lot has already been said about the topic. Things have definitely changed in the last one decade. Financial markets are more macro driven today and face a different set of risks. Financial strength and capital adequacy are pretty good across the world for most banks. Regulatory regimes are better prepared and global growth is fairly robust. The major risks ahead that I see are - rising interest rates, increasing protectionism and higher inflation in the short-term.
Interest rates in the US have already gone up and could go higher. In India too, we have seen bond yields going up over 100 Basis Points. While the short-term impact on growth has been muted, medium-term higher interest rates could slow down global growth and lead to other risks, including a potential recession across some economies.
The Indian economy today is better placed due to strong domestic demand drivers, but worsening trade flows and fiscal deficits are factors that India needs to be concerned about.
How intense is it for emerging economies?
We have already seen increased volatility in the emerging markets as compared to the US markets. The US markets have been in an upward trend with low volatility over the last few years. That could change as risks outlined earlier rise.
What are the factors likely to dominate the domestic market?
Apart from oil prices, the US trade policies could be an important driver for what happens in the global financial markets, including India. Also, it is important to track the dialogues on the US and China trade relations.
Do you think globally firming interest rates will impact the liquidity flowing into the emerging markets?
Yes, that is already happening. For example, foreign investors buying Asian equities has reversed in 2018. There have been significant net outflows by foreign investors from the emerging markets. India is the only market where foreign selling has been muted as compared to the other emerging markets. Of the $25 billion outflows across Asia (e.g. Japan and China) by foreigners, India accounts for only $1 billion. Countries like Indonesia and Thailand have seen foreign investor selling about $4 billion and $6.5 billion respectively in 2018. Trading volumes are at multi-year low in several Asian markets which are an indication of liquidity drying up.
There could be more impact on the bond markets. Higher yields in the US would make it more attractive on a currency adjusted basis for investors to be in the US bonds rather than the emerging market bonds unless they can effectively hedge the currency impact. This would only exacerbate the currency problems that emerging markets are facing. Corporates in emerging markets including India could also see the cost of foreign debt going up which would further impact profitability.
How good or bad is corporate governance in India?
Globally it is believed that the Indian corporate governance is not at par with developed markets. My experience tells me that this is not true. In fact, India is ahead of many other emerging and even developed markets in corporate governance. The Companies Act 1956 has put stringent procedures in place which is helping corporate governance to improve in India. A simple example is that in several countries, telephonic attendance suffices for board meetings, but in India there are clear rules on attendance requirements.
I think the issues, I see, are the various changes that keep getting proposed, some of which are not very practical. Because of some frauds, we have put in place certain regulations that appear overtly restrictive. As an example, the rest of the world allows independent directors to receive equity for their services so that they are aligned with the long-term value creation of those companies. In India, it is not allowed. I would say that in our current board practices, given the strength, quality and diversity of India, it is as good as most developed markets and perhaps better than most emerging markets.
Why has disinvest-ment been slow in India?
Slow disinvestment is the result of lack of credibility for many years. A disinvestment process does not necessarily result in great benefits for the companies unless they are accompanied by improved governance and a changed mindset. Simple things like, when a private sector company comes into the market and does an offer for sale, the level of marketing around that, follow ups, relationship with the investor, departments that they have already developed and the constant level of communication, gives confidence to the investors. What we have seen in the public sector companies is, when they come for an offer, there is no follow up on it, no investor relationship, and no one from the company is continuously addressing the concerns of the investors and constantly updating them on how the organisation is doing from the point of the investor.
So the investor loses faith and does not want to necessarily come back again. There is also not enough transparency in government-owned institutions. So I think there is a lot that needs to be done in terms of improving the corporate governance in these companies before you just bring them to the market for disinvestment.
SEBI proposed to relax foreign fund rules for Non-Resident Indians (NRIs) and for persons of Indian origin (PIOs). Will it attract more funds?
It will certainly help, because the rules that were initially proposed were detrimental to both NRIs and PIOs. Relaxing these norms is a good idea. A large number of funds, in particular the smaller ones, are managed by NRIs and PIOs. They are the real ambassadors for Indian equity markets across the world. And limiting them would be detrimental for marketing the India growth story.