India Has A Quadruple Balance Sheet Advantage Today

On India today, the opportunities, and challenges…
India today is actually in a pretty good place, globally. But as with everything in India, it's never “a hundred” or “a zero”. I think, India is always in between. But I think in the last three-four years, post-Covid, India has become relatively stronger.

Five-six years ago, the then Chief Economic Advisor, Arvind Subramanian, in one of the Economic Surveys, said, “India had a twin balance sheet problem.” Corporate balance-sheets were stressed and the bank balance-sheets were stressed. Now, I have an opposite point of view. Now I think, we have what I would like to call a “quadruple balance sheet advantage”.

The government balance sheet is fairly strong. Tax revenues are robust. GST is robust. Overall, the government fiscal balances are in a controllable place, especially after Covid, unlike in many other countries.

Second, the RBI balance sheet is in a very good place.

Third, the bank balance sheets are the best that I've seen in my 34 years’ career in India.

Fourth, the corporate balance sheets are very healthy. Everybody has reduced debt. Everybody has made themselves stronger. So, we have a “quadruple balance sheet advantage”.

(On the flip side), the household balance sheets and the rural balance sheets are still slightly weaker than what they were pre-Covid. We are seeing consumption slowing down in the last three-four months. So, that's the minus part. But that is true all over the world. I think that is because of inflation. Everybody's trying to slow down the economy to bring inflation in control.

However, I maintain that India is in a relatively good place. Our physical infrastructure and the digital infrastructure are falling in place at a much faster pace than we realise.

Take the case of entrepreneurs. About 5 to 10 years ago, most entrepreneurs came from Bombay, Delhi, Bangalore. But in the last 8 to 10 years, we are getting entrepreneurs from Ujjain, Indore, Varanasi, Bhopal and such centres. That is partly because of the digital and physical infrastructure of India. So I think India is in a pretty good place. We also have popular shows like Sharktank.

On global uncertainties and headwinds, and if they are areas of concern
I don't think it is a major point of concern. Our economy is not so coupled with the global economy. Very often, when the global economy slows down, it is usually good for India. And the reason is when the global economy slows down, oil prices come down, interest rates eventually come down. India imports capital and we import oil. However, our exports get impacted. A global slowdown, in sum, may be a small opportunity.

However, our stock market and financial markets are a lot more coupled to the global environment. So the economy is on the one side and the markets on the other side. The markets are a lot more coupled with the global environment than the economy itself is.

I would also like to think that we will grow at 5 to 5.5 per cent, and the balance would be a function of global factors.

On the government expenditure rising, but private expenditure not keeping pace
I think there is a lot of capacity that is already there because what happened with this entire NPA crisis and the NCLT and the IBC, etc, instead of putting fresh capex, a lot of the old investments, which were not productive, are also getting productive. For instance, the Tatas acquired Bhushan Steel and ArcelorMittal acquired Essar Steel.

Most private sector companies are doing brownfield investments, rather than greenfield, because greenfield will take maybe around eight years. If one looks at UltraTech, Dalmia Cement, or other cement companies, or those from steel and auto, more and more brownfield investments are happening.

New investments, fresh greenfield, is happening in either in the electric vehicle sector or the green energy sector where new solar plants etc. are coming.

And the third factor is that interest rates are going up. And most corporates over the last five years have been told to reduce the balance sheet.

On the diversified financial services companies, the opportunities and challenges
If one looks at most of the diversified financial companies, there are about five or six verticals. Capital markets and wealth management is one, asset management, life insurance, general insurance credit, and maybe, housing finance. So, ultimately these are the main verticals in financial services.

There are three financial services regulators, the RBI, IRDA, SEBI.

If you look at most of the successful financial conglomerates, they are all banks -- ICICI, Kotak, State Bank of India, HDFC.

In 2016, the RBI came out with a new guideline saying that banks cannot be “holding companies” anymore. So after 2015-16, there cannot be a bank which has a mutual fund and insurance company under its services.

They want a holding company and a bank to be an operating company. They don't want any contamination risk in the bank by having insurance and mutual fund as subsidiaries in that. That's a rule that happened in 2016-17.

Mutual funds cannot be a holding company. And an insurance company cannot be a holding company and a housing finances company cannot be a holding company.

So I think this entire financial conglomerate structure is undergoing a big change.

So what we are doing is we are not becoming a holding company. We are becoming an investment company where we build businesses and financial services like wealth management and then spin it out and basically reward the shareholders in a more capital efficient manner.

So that is what others like IIFL are also doing. You would have seen Alibaba is also doing it.

So I think holding companies structure for financial conglomerates are very cumbersome if you're not a bank.

In the last five years, we have divided Edelweiss Financial Services like an investment company.

We invest in businesses, build a business, invest in management. After a certain stage, we have to make them independent and release the capital for our shareholders.

So this whole thing about investing capital, releasing capital, allocating capital, relocating capital becomes a very important part of an investment company. This is not as well-known in India.

We have, in the last four or five years, pivoted to a financial investment company or investment company in financial services. And when we do the wealth management team merger in this quarter, it'll be the first example of its kind where we have truly given up control, where we have truly spun off a business and we have truly released capital and given shares to our shareholders. This does not happen in India because everybody likes to keep control. So it is going to be a first example of its kind where we have truly built a business over 20 years and then spun it up in the market and made it independent. It's a first of its kind in India. I do hope that this becomes a template for others in India.