The formation of PDCs will look at large projects that will be built across two to three countries in Africa. Yaduvendra Mathur, Chairman and Managing Director, Export Import Bank of India, tells RAHUL KAMAT that this will be the first time that the bank is looking to set up PDCs and this move will also be a first for Africa.
At the beginning, let me have your reaction to the Government seeking a relaxation in the Reserve Bank of India's borrowing limit for the Exim Bank.
Exim Bank's quantum of lending, given its capital structure and liquidity norms, is, in effect, synonymous with its borrowings, and as such, the leverage ratio determines the Bank's business growth. The Bank's trend annual average rate of growth in its loan business has been in the range of 15 per cent-20 per cent. The current borrowing limit permitted by RBI viz. 11 times the bank's net-owned funds (NOF) is valid up to August 31, 2014, whereafter, it reverts to the base borrowing limit of 10 times of NOF. At the latter level, the bank will have little headroom to grow its business during FY 2014-15. Hence there is a need for a relaxation in the borrowing limit by RBI.
The EXIM bank is planning to set up a Project Development Company with the African Development Bank ( AfDB). Can you help us to understand how this can help Indian companies to grow further with Exim Bank?
Exim Bank is almost at the final leg of setting up the Project Development Company (PDC) in Africa, with the participation of State Bank of India (SBI), IL&FS and African Development Bank. The new company will essentially look to bring infrastructure projects in Africa to a bankable stage and facilitate exports from India to Africa. This is the first time Exim Bank is looking to set up a PDC and also the first time in Africa. The PDC will look at large projects that will be built across two to three countries in Africa.
As far as Exim Bank is concerned, it has a significant portfolio in Africa, ranging from having supported many companies from India in the region. Besides we have extended a number of lines of credit to countries in Africa for projects involving infrastructure. Banks, through Lines of Credit funding mechanism, have been successful in creating a difference at the bottom of the pyramid to the overall socio-economic development of recipient countries in Africa as well. Exim Bank also has three regional representative offices in Africa. All these give the bank an edge in contributing towards this venture while helping Indian entities to enter the huge African market.
Does that mean that the African region offers a plethora of opportunities?
Indeed. The African region as a whole offers tremendous potential. Opportunities for partnering Africa in developing its infrastructure are enormous – more than half of Africa's recent improved growth performance was a fallout of investments in infrastructure development. Africa needs around $93 billion annually until 2020 for its infrastructure development. Of this, about 2/3rd is required for new investment in physical infrastructure and the remaining for maintenance and operations.
Is Exim Bank looking beyond Africa, and which are those identified countries on your radar?
Exim Bank is essentially a development financial institution and its objective has been to provide financial assistance to exporters and importers with a view to promoting the country's international trade. The Bank's Africa focus is largely because there exist opportunities for growth but there are less number of institutions ready to participate in this opportunity. It is here that the bank has played a pivotal role in enabling Indian entities to enter into such prospective countries. The Bank is also in the process of designing a new business strategy over a 5-10 year horizon. Through our new strategy, we may consider looking into newer activities in sync with the Government of India's policies and vision, including diversifying export markets and destinations. We believe that funding sectors like hi-tech exports, SME clusters, and overseas investments, will yield rich dividends for the economy. The Bank is also keen to play a more proactive role in policy formulation, capacity building and advisory services, utilising our strengths in research and analysis, and export marketing services.
What is the extent of impact of the sluggishness in western economies and the growing uncertainty?
According to the World Trade Organization (WTO), global trade grew at a sluggish pace of 2.1 per cent in 2013, attributed to the lingering impact of the EU recession, high unemployment in euro area economies (Germany being a notable exception), and uncertainty about the timing of the Federal Reserve's winding down of its monetary stimulus in the US. The sluggish pace of trade growth in 2013 was due to a combination of flat import demand in developed economies (0.2 per cent) and moderate import growth in developing economies (4.4 per cent). On the export side, both developed and developing economies only managed to record small, positive increases (1.5 per cent for developed economies, 3.3 per cent for developing economies).
Will risk averseness impact India's exports?
The slowdown in global demand partly resulted in slower pace of growth in India's exports during 2013-14. Growing at 4 per cent, it stood at $312.4 billion, up from $300.4 billion in the previous year. However, a cross-country comparison shows that India's global exports growth in 2013 was higher than that of countries like South Korea (2 per cent), Russia (-1 per cent), Thailand (0 per cent), Malaysia (0 per cent), Indonesia (-3 per cent), Singapore (0 per cent), Mexico (3 per cent) and Brazil (0 per cent).
In line with the projected pick up in global trade in 2014 and 2015, projected pick up in GDP of the US and the EU region also augurs well for India's exports. Both the US and EU region account for over 30 per cent of India's exports. The GDP of US is projected to improve from 1.9 per cent in 2013 to 2.8 per cent in 2014 and further to 3 per cent in 2015. Similarly, the GDP of the euro area is projected to increase from -0.5 per cent in 2013 to 1.2 per cent in 2014 and further to 1.5 per cent in 2015. In emerging economies, which are also important trading partners for India, GPD growth is expected to pick up from 4.7 per cent in 2013 to 4.9 per cent in 2014 and further to 5.3 per cent in 2015.
Growth in exports of developing economies, including India, therefore, is expected to be supported by rising import demand on the part of developed countries, with the US economy gaining momentum, and improving economic conditions in Europe. In addition, pickup in real GDP growth in developing regions such as Africa (from 4.9 per cent in 2013 to 5.5 per cent in 2015), and Asia (from 6.5 per cent in 2013 to 6.8 per cent in 2015) is also expected to provide the necessary boost to India's export growth.
The Current Account Deficit (CAD), persisting inflation and the falling rupee pose serious threats. How do you address these issues?
I do not think that all these factors have had a serious and significant bearing on Exim Bank. Rupee volatility has obviously been of concern impacting both borrowing and lending operations of the Bank. Exporters at the same time were not able to hedge to that extent during the 2013 volatility cycle which was triggered by the Fed's announcement to taper its stimulative quantitative easing policy.
As far as CAD is concerned it has shrunk from 4.8 per cent to 2.3 per cent of GDP because of administrative measures to curb gold imports as well as more robust export growth following the depreciation of the rupee, though India will still be dependent on strong inflows of portfolio capital to fund its current account gap. India has also managed to rebuild its reserves, thanks to the attractive swap offered to banks for non-resident deposits as well as some buying of dollars from the market. India's foreign exchange reserves at around $300 billion are comfortable in terms of reserve adequacy. Hence, the Indian economy seems to be in a relatively better position than a few months ago.
It's good news that we have brought down the CAD, but what about trade deficit? India's manufacturing segment is a crucial gear in the wheel of economic progress; the sector's contribution to GDP being around the range of 14-16 per cent for several years indicates that the sector has not been given adequate attention. The trade deficit in sectors such as capital goods, chemicals, fertilisers, metals & products, paper products, plastic products, rubber, ceramic products, and technical or medical apparatus cumulatively amounted to nearly $75 billion, a share of over 80 per cent of India's current account deficit in 2012-13; hence there exists tremendous opportunity for Indian manufacturing to concentrate on these areas.
The strategy to be devised for the specific sectors needs to be identified with the objective of not only enhancing manufacturing exports, but also towards containing our manufacturing imports. This will bring down the trade deficit, and thereby make the overall current account deficit, and volatility in rupee far more manageable and sustainable. Exim Bank plans to continue its efforts to enhance capacity additions through its programs.
Do you agree that with the lowering of CAD, there will be positiveness in the Indian business environment?
According to the Finance Ministry, CAD in 2013-14 has been brought down to $32 billion (1.7 per cent of GDP), significantly lower than the $88 billion (4.8 per cent of GDP) recorded in the previous year. This broadly reflects a sharp decline in gold imports since July 2013, and moderation in imports of capital goods. With revival of capital flows and lower CAD, concerns about the financing of deficit in the current account have eased. Lower CAD is expected to result in positive business sentiments, improved consumer confidence, pick-up in both domestic and foreign investment, and recovery in growth, thus giving further boost to export growth.
As a banker, what is the timeframe you are expecting where finally, some favourable movement could happen? Moreover, what are your suggestions for the new government?
This new government has been provided a historic opportunity and I am confident that they will live up to the people's mandate. If I have to suggest a 10-point agenda, then it will be as follows:
- Take immediate measures to boost the manufacturing sector in India. The sector holds the panacea to too many of the perils of the economy from job creation to import substitution.
- Take steps to bring inflation under control to give monetary policy the room to support growth. While sustainable supply-side measures may take time, in the short-term, this could be attempted through better management of agricultural output and efficient movement of output to markets to eliminate avoidable supply shortages.
- Resolving the taxation issue and bringing clarity around tax laws, which would be a major confidence-building measure for global investors and encourage further investment in India.
- Taking up implementation of the Goods & Services Tax, given its potential to boost economic activity.
- Give much needed acceleration to all the infrastructure projects which are either held up or are stuck, while considering building world-class ports in the country.
- India is poised to face an enormous energy crisis in the years to come. Emphasis has to be given for green energy. In fact, green and new renewables may be considered to be bought under priority sector lending.
- The government will have to focus on regulatory reforms that will improve the ease of doing business, reduce transaction costs and expedite approval timelines.
- Information Technology needs to be leveraged optimally to make administrative governance in India transparent and stakeholders accountable.
- I sincerely feel that India has not built a good city since independence. While new cities are being built with world class facilities and job opportunities around them, it is time that greater prospects are created in Tier-II and Tier III cities, so that the existing metros are not burdened.
- Initiate administrative reforms particularly in police, judiciary, land, and labour.
These moves will help to give the sector a big boost.