The financial champion of the much-hyped DMIC is largely tight-lipped about it. Shin Oya, Chief Representative, Japan Bank for International Cooperation (JBIC), tells Shilpi Aggarwal why his country may be waiting for the next general elections, is guarded on some questions but has no hesitation to say why the Indian government must treat ECBs better, and that the land bill will negatively impact investments. Should Japanese investors be worried about India?
What are your readings of the current economic situation India is in with current account deficit and free fall of rupee? How do you view RBI´s action in this regard?
Of course, it is not an easy situation. [US Federal Reserve Chairman] Ben Bernanke´s suggestion for tapering quantitative easing on 22 May affected Indian currency very much, leading to a considerable depreciation in a value of a rupee. Union Finance Minister P Chidambaram announced a measure on 12 August at the parliament aimed at decreasing imports by, for example, increasing tax on gold import, and enhancing capital inflow by relaxing External Commercial Borrowing (ECB) regulations and by supporting PSUs´ issuing bonds in foreign market. I believe these are appropriate measures.
This fiscal deficit is repeatedly being compared to the fiscal deficit faced by India way back in 1991. But we need to understand that this time the situation is very different. At that time, India had a foreign reserve of just 10 days of import. Now, India has a foreign reserve of almost 6 months of import. So, I think, we don´t need to panic. However, we need to look into the root cause of this situation what led to India to this situation. Indian export is just less than
two-thirds of import. Therefore, we always worry about how to finance the Current Account Deficit (CAD). We have to be more serious about how we can export more. Of course, strengthening of manufacturing sector is quite important. India has a strong and resilient manufacturing sector, which can increase its export by responding to a depreciation of rupee. Vibrant manufacturing sector contributes macro economy and it can also help fight against poverty by providing ôgood jobsö to India´s growing population.
Why is there a lackadaisical response to the devalued rupee among international banks? For example, why are we not seeing an upswing in ECB?
The amount of ECB is limited because the ECB is still heavily regulated. RBI understands this and has started liberalising it gradually. For example, the limit of ceiling for borrowing from foreign branch to head office of an Indian bank is relaxed from 50 per cent to 100 per cent of its unimpaired tier1 capital, together with preferential swap rate. Now, working capital finance by ECB has also been allowed if the lender is a parent company which owns 25 per cent share of the borrower.
So, the Indian government is liberalising ECB and it has some effect on inflow. But it is not a big change. Now, another problem regarding ECB regulations is that it has become so complicated that many bankers cannot understand exact content of ECB easily. Sometimes, RBI is required to issue clarification, which causes new ambiguity etc. A simpler and more radical liberalisation of ECB is awaited and that will reduce transaction cost.
Is the present political and economic environment dampening the sentiment among Japanese investors?
The downward revision of Indian growth rate is affecting investment plan by the Indian as well as foreign investors. Some investors would like to see the results of general elections going to be held next year in India. So, it is not an easy time for India at present.
We, however, need to look the entire things in a long run. India´s long term growth potential is huge, and this market will definitely grow at the higher pace than any other countries. So, foreign investors cannot stay away from India for long. Here, the most important thing is that India gives foreign investors a good business environment. Everyone knows that India needs to have better infrastructure, such as stable power supply, seamless road connection, easy access to ports, and sufficient water supply.
What is your take on the land acquisition bill passed by the Indian parliament? How might it impact the investments from the Japanese business community?The recent land acquisition legislation passed by the Indian legislatures certainly has posed more problems for investors, particularly foreign investors. I am great believer in democracy and I respect the decision of Indian parliament. I also understand that the land acquisition law of 1894 has problems, and there is an essential need to give it more transparency and predictability. We, however, also need to consider how to avoid hold-up issues, especially when we provide public goods.
However, land acquisition does not kill a project. In other words, fair and efficient land acquisition is prerequisite for investment in manufacturing and in infrastructure, and without that, it is difficult to achieve high economic growth and poverty reduction.
I understand that the Indian industry shows strong concerns over new land acquisition bill which requires a prolonged amount of time to acquire land, and cost of acquisition could increase tremendously. I hope some calcification on this new law will give sufficient comfort to industry. Usually, foreign investors, including Japanese investors, do not have comparative advantage for acquiring land. If this new law affects Indian investors negatively, its negative effect on foreign lenders could be larger.
How does JBIC view investment opportunities in India? What are the areas in infrastructure that are of immediate interest to your bank?
We basically support projects in which Japanese companies are involved in as equity providers, equipment suppliers or contractors. There are many potential areas where Japanese companies have interest, which include power, renewable energy, ports, airports, railways, LNG, etc.
In other Asian countries, JBIC has many experiences in power sector. In India, our experience on power sector is skewed towards public sector units (PSUs). I hope that the environment for IPP investment is also improved.
>Towards that end, striking the right balance regarding risk allocation is quite important. A basic principle for PPP including IPP is that the risk should be borne by the entity who can manage such risk most efficiently. This is easier said than done. The more practical way is just look at the result of private sector investment in PPP. If investment to PPP by private sector is less than expected amount, some more risk take by the central or state government or more VGF (more than 20 per cent) or both is necessary because that is the voice of the market.
As India has emphasised its infrastructure plans, Japan has also recently expressed interest in increasing its infrastructure-related exports in Asia. What is your strategy to go forward in this market? What are the projects you are currently involved in? What are the big ticket investments in infrastructure on the cards for JBIC this and next years?
We support projects in which Japanese companies are involved. Therefore, investor-friendly climate for infrastructure is the most important element. We do not have predetermined focus sector and we are flexible on that. The Delhi-Mumbai Industrial Corridor (DMIC) is an important initiative between Japanese and Indian governments, and we would like to support this initiative as much as possible.
However, going by the current market conditions, at present our focus is on investing more in private projects. If situation improves, we would like to go into investing more in PPP projects.
How much investment has been earmarked for this fiscal?
We don´t earmark any corpus for our investments. It depends on demand. Of course, financing needs should meet our two criteria: involvement of Japanese company, and bankability of a project. These two things are preconditions for our financial support. Sometimes, these two conditions are easily met. For example, if a creditworthy Indian company sources capital equipment from Japanese company, we can provide loan to that Indian company, because both those criteria are satisfied. >
A difficult situation, on the other hand, is when there is some infrastructure project whose viability is in doubt. For such projects, Japanese companies hesitate to participate and bankers, including JBIC, also feel difficulty in providing loans. So, the most important thing is [to see] how India can create a good business environment under which more bankable projects come up and more Japanese companies come to invest. If this is done, our loan can be increased by two, five or even 10 times.
Japan Bank for International Cooperation (JBIC) works in close coordination with Japan International Cooperation Agency (JICA). Can you please throw light on the mandates of the two organisations? How are they positioned to exploit the business opportunities in India?
Both JBIC and JICA are Japanese governmental agency and we have good collaboration. JICA is official development assistance (ODA) institution and it mainly provides finance to the Indian government and its projects. JBIC provides finance to corporates, public sector units (PSUs), banks, and special purpose vehicles (SPVs).
>JICA can also carry out technical assistance of Japanese ODAùas part of such technical assistance, JICA conducts various studies.
Internationally Yours, Japan
Ten years after its foundation (when the Export-Import Bank of Japan and the Overseas Economic Cooperation Fund, Japan merged to form JBIC), JBIC started to participate actively in India´s infrastructure and manufacturing industries. Last year, a new JBIC, with a fresh corporate philosophy, was formed. Ranked Aa3 by Moody´s and AA- by Standard & Poor, JBIC´s medium term plans and carefulness towards India´s PPP projects may go together.