IUKDPF Research Associate Dr. Jai Bhatia speaks with Dr. Yogendra P. Trivedi – Board Member of Reliance Industries, Member of Parliament, Senior Advocate of the Supreme Court of India – on the history, current trends, and opportunities for Indian Development Finance.
JB: How do you as a policymaker understand development finance in India and how has it changed after the 2000s?
YPT: The history of development finance in India goes back to 1948 when various development financial institutions were set up and specialized in long term lending – such as the Industrial Development Bank of India (IDBI), the ICICI, EXIM Bank, the National Bank for Agriculture and Rural Development (NABARD) and others – then there was also the Unit Trust of India (UTI) for investment, the Life Insurance Corporation (LIC) and the General Insurance Corporation (GIC) for insurance. Over time, some of the larger organizations like IDBI and ICICI were eventually converted into banks. So today for development you go to commercial banks. If their project is large enough, they form a consortium to lend, which allows development to take place. It should be noted that there is considerable liquidity with the banks now. So, financing development is not the problem; the problem is with the banks and their non-performing assets (NPAs). There are various reasons for NPAs; first, loans can become NPAs because certain government policies have changed resulting in some projects being stalled. Second, due to changes in the economic and financial environment which leads business to become unviable. Third, because people who have taken loans did so with no intention to repay, thereby becoming wilful defaulters. Large NPAs had to be written-off in phases by Indian banks, and are now slowly decreasing, though access to development finance is not much of a problem.
“…there is considerable liquidity with the banks now. So, financing development is not the problem; the problem is with the banks and their non-performing assets”
JB: What was the core thinking in India behind converting development banks to universal banks during liberalisation? Could you compare this thinking to China’s strategy to establishing development banks while undergoing liberalisation?
YPT: The universal banks did not start as universal banks; they’ve almost evolved into such when these Development Financial Institutions also became banks. They’ve started doing the same job that commercial banks were doing, either in the private sector or in the public sector. So, automatically there came into existence all these universal banks. It is not a result of any legislation on the part of the government but because of the economic development that has taken place in the financial sphere.
JB: What has made international development projects attractive to the Indian private sector? How do large India companies invest in the Global South and what does the Indian Government do to support Indian companies investing abroad?
YPT: Our government is very much as our Prime Minister has stated: it has become ‘atmanirbhar’ in the sense that it has become self-reliant. ‘Make in India’ is a shining example. The government has invited foreign companies to come and invest in India. Now, so many of them are coming because of the disenchantment with China. The government is also removing whatever bottlenecks there are and slowly eliminating the bureaucratic hurdles and red tape-ism. So, for investment coming from abroad, the government’s policies are very helpful and productive. So far as the Indians going out and investing, it depends on country to country – there are bilateral agreements and multilateral agreements. However, by and large, the government’s emphasis is more to invite people from outside to come and invest in India. Now, Google has come, the petrochemical companies are also coming, the government is inviting them with open arms. They want India to be able to compete with China in manufacturing.
JB: How attractive are development projects in Africa to the Indian private sector? How do big Indian companies invest in Africa in terms of contracts, arrangements and financing?
YPT: They are all bilateral agreements and there are large corporations which are investing outside the country, largely in Africa and the Middle East. The government is trying to facilitate them to the extent this is possible. Many people have gone, some have harvested rich profits while others have been disappointed because they were not able to adapt to the political and the economic environments in other countries. Reliance tried retail distribution of petrol in Kenya with Total but then there were problems. Different countries require different types of expertise. For India to build this expertise, it would require a different type of framework that India will have to develop eventually.
JB: Is the type of framework that you mentioned, economic or political? Could you talk a little bit more about what kind of framework India will have to develop to have that advantage?
YPT: India will have to develop the physical and financial infrastructure, the management personnel, the type of expertise which is needed for putting up industries abroad or making investments abroad. It’s not the same thing as investing in India where the climate is different; every country has its own social, political and financial climate. There are some countries where you cannot enter unless and until you are prepared to grease some of the people in authority. The multinationals from the United States and other developed countries are experts in managing foreign countries, whereas Indian companies are slowly trying to capture as much as possible within their means. The government does not come in the way of their exporting capital as capital mostly goes in the form of plant and machinery. There are so many companies in India that have started sugar factories in Africa, especially Ethiopia.
“The multinationals from the United States and other developed countries are experts in managing foreign countries, whereas Indian companies are slowly trying to capture as much as possible within their means.”
JB: What are some of the main sources of financing for these international development projects for large Indian companies? Do they use mostly Exim Bank or do they use other public sector banks as well?
YPT: They go to Exim Bank, they go to public sector banks, they go to international banks also, they try whatever funds are available; they try to tap them on their terms. There are no restrictions on that.
JB: In terms of this new concept of blended finance, can you comment a little bit on how blended finance allocates risk and return in practice? Can you provide insight on why Indian companies decision making logic for investing abroad?
YPT: That depends from case to case. For example, now because of the garment industries picking up so well from Bangladesh, apparels from Bangladesh has customs discounts or is customs free in EU countries. So, many Indian companies are trying to establish companies in Bangladesh. Ultimately using this channel, Indian companies get access to the European markets, which is tax-free. The fabric and machinery are sent from India but they may be putting some buttons here in India. I think the government is going out of their way to encourage productive investment abroad. Also, companies such as Dell, Apple are moving to Bangladesh and putting up factories there, which highlights a broader global trend.
JB: How is Indian overseas financing discussed among MPs when you have discussions in the Lok Sabha and the Rajya Sabha? Is there a good understanding of all the complex financial mechanisms or how does it work in actual policymaking?
YPT: To be very frank, there isn’t much positive or constructive participation on the floor of the house. There is a standing committee for finance where every party sends their representatives, who are well versed in economics and finance, and these things are discussed in great depth and decisions are taken which are handed over to the Finance Ministry or the Ministry of Economic Affairs. These discussions do not take place at the floor of the House; the people on the floor of the house are not that well versed to discuss and talk about the intricate financial implications of complicated structures of financing. This happens in every country, even in Britain, where you will find that committees are appointed to address such matters. The advantage of the committees is that they can call the Reserve Bank of India Governor and they can call the Chairman of all or any of the banks to talk to them to understand their issues, lay down the economic priorities of the government, and find resolutions to the big problems.
JB: What are some of the biggest opportunities for international trade and investment for the Indian private sector to and from India and what are the biggest challenges that they face?
YPT: The biggest opportunity is in India as it has a vast market, about 132 crores of people. The number of people in the middle class is increasing and, therefore, the appetite for consumer goods is growing. This is not the case in some of the smaller developing countries, even though there may be tremendous potential to trade, there may be fewer consumers. In India, there are buyers. As there are the social, economic, political differences (in comparison to India) in African countries and Middle Eastern countries, Indian companies have to learn to adapt and adjust to those environments.
Another point that I must mention is that labour in India is not only cheap, comparatively, but it also has a significant number of skilled and semi-skilled people. Labour is available in abundance. India has made big investments in education – in its universities and its research institutions. Indians who have then migrated to other countries like the United States or UK have been a tremendous help and assistance to those countries.
There is another opportunity for foreign companies to come to India, if they can get accustomed to dealing with the bureaucracy and the red tape-ism. Although it should be noted that India has a very strong judicial system where everybody is considered as equal, there is no difference between an Indian and a non-Indian. The judiciary has awarded significant amounts to foreign multinationals when they were in the right. For example, two penalties were waived by Supreme Court regardless of the amount involved in the tax case of Vodafone.