Reforms need to be backed by rapid execution, say panellists at VCCircle LP summit

02 March, 2017

The 2017 Union Budget can lead to long-term benefits if policy reforms are implemented at the ground level, said panellists at News Corp VCCircle Limited Partners Summit.

Participating in  a discussion on ‘Macro budget reforms to micro business environment’, Sujan Hajra and Saugata Bhattacharya, chief economists at Anand Rathi Securities and Axis Bank, respectively, said the budget has focused on pushing rural consumption, containing inflation and providing budgetary allocation to the productive sectors of the economy. The success of the policy framework is visible with inflation being range bound and improvements showing up in current account deficit.

However, India has been lagging in tackling larger worries such as poor monsoon and GST calibration in addition to challenges at the global level such as Donald Trump’s policy, Brexit and falling oil prices, said Bhattacharya. “China’s share in global trade was 4% in 2000 and moved to 14% in 2015. India moved from 1% to 2%. China’s currency basket moved 1.5 times from 1995 levels. Ours has been mostly the same,” Bhattacharya said. However, reforms in terms of tax, land and labour will improve growth numbers, he said.

Hajra said there is a healthy level of skepticism about the way India measures GDP especially since January 2015 because of the jump in growth. “I wouldn’t be surprised if India’s GDP growth crosses 10% next year. Next 24 months are going to be exciting especially for the equity market. India will look very different in 12 months from now”.

However, Kanwal Rekhi, MD, Inventus Capital Partners, said the Budget has failed to differentiate its priority. “While the government is focused on developing the ecosystem, about 99% of money is coming from overseas right now. We are confused as to what policy results the government is trying to achieve – build a local ecosystem or create jobs? In the venture capital ecosystem, with a life of seven to eight years for investments, the country has not attracted enough investments for several years and has not been able to offer attractive returns and this is a fundamental issue. Returns are not there compared with China. If we want a dynamic startup environment, a startup framework has to be there,” Rekhi said.

Rekhi said venture capital activity has been slowing down due paltry returns. “A Rs 10,000 crore fund is not going to make any difference and the image of India is not bright among the LP community.”

However, Rekhi said the Budget has cleared uncertainties in terms of tax for limited partners (LPs) looking at India. The finance minister has provided clarity on the conversion of preference shares to equity which benefits private equity firms. Most PE firms prefer to make investments in the form of preference shares. Earlier, it was not sure if conversion of preference shares into equity was going to be taxed or not. The finance minister has now clarified that this is not taxable.

Krishnava Dutt, managing partner of Argus Partners, said there has been a growing interest in control deals. India has statistically ranked high in minority interest (deals), but there is a lot of dependence on arbitration. Institutions such as National Company Law Tribunal requires allocation of funds to implement the law.

Earlier, participating in the keynote discussion, panellists  

said the Modi government’s engagement with the investment community and a slew of policy proposals it announced after assuming power have provided a boost to the industry, though there is a need for rapid execution of policies.

A lot of the India story is dependent on the government’s policy, said Prashant Purker, MD and CEO of ICICI Venture. “India is a large structural story. But a lot depends on policy. Global developments have an impact, but that is marginal,” Purker said. Globally, there is enough surplus capital that is going around and is available, he said.

Gopal Srinivasan, chairman, TVS Capital, said changes in AIF policy and tax among others have provided clarity. According to him, the rise in rupee investments has also attracted foreign capital. “If Indians are investing in India, there must be something that we don’t know about. That has also enhanced international investors’ interest in India,” he said.

Rahul Bhasin, managing partner at baring private equity partners (India) said the government seems to be keen on making large investments in power and road sectors which is positive. “We should be growing at 15% a year; slower growth is frustrating. Speedy execution could fix a lot of constraints,” said Bhasin.

Purker said the government and the investment community as a whole need to be asking long-term questions. Can there be privatisation of banks or airlines? What is the tax rate going to be? The government has an opportunity to lay out a long-term road-map, instead of focusing on increments, he said.

Bhasin said while the government has the right ideas, it needs to implement them in a different way.  Housing is a huge pain point which needs to be addressed with more private sector participation, he said. “The government wants to build 10 million homes per year over the next 10 years. But it should be focusing on building the infrastructure for housing including electricity, water supply and sanitation and leaving the actual construction of the houses to the private sector,” Bhasin said. “If there is one reform the government can do, it is to open up senior government roles for people from the private sector,” Bhasin added.

While the government has done well to bring policy changes in some sectors, it still needs to replicate the process in other sectors, said Archana Hingorani, CEO of IL&FS Investment Managers. “Long-term capital is coming into India, but they (investors) are focusing on safer bets. This is partly  because investors are scared by their previous India experience. More needs to be done for the revving up the growth machine,” Hingorani said.  

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Reforms need to be backed by rapid execution, say panellists at VCCircle LP summit

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