Ivo Pezzuto - THE GLOBAL ANALYST JUNE 2015

1The Global Analyst | JUNE 2015 |
A N E X C L U S I V E M O N T H L Y O N B u s i n e s s & F i n a n c e
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A Media Five Publications Flagship
June 2015
Volume 4 Issue 6
MODIVERSARY
Modi
Government
delivers, but
needs to do
lot more
SPECIAL ISSUE
100
MAKE IN INDIA
What Can Make it
Happen?
AGRICULTURE
Can mobile phone
services be an
agent of change?P6
SUSTAINABLE LIVING
How Ecova Reduced its
Carbon Footprint
P54
MANAGING
STRESSED ASSETS
Racing against Time!
P32 P44

The Global Analyst | JUNE 20152 |

June 2015 Vol. 4 | No. 6
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It doesn’t take much to understand that all is
not well with the Indian agriculture. The share
of the agriculture sector in the country’s GDP
has more than halved in the last two decades and
a half – from 32 per cent in the 90s to about 14 per
cent now. And though its contribution in the GDP
has consistently been declining, more than 60 per
cent of India’s population depends on agriculture
A WORD From EDITOR
Saving Agriculture
1The Global AnAlyst | JUNE 2015 |
A N E X C L U S I V E M O N T H L Y O N B U S I N E S S & F I N A N C E
June 2015
Volume 4 Issue 6
MODIVERSARY
Modi
Government
delivers, but
needs to do
lot more
SPECIAL ISSUE
100
MAKE IN INDIA
What Can Make it
Happen?
AGRICULTURE
Can mobile phone
services be an
agent of change?
P6
SUSTAINABLE LIVING
Carbon Footprint
P54
MANAGING
STRESSED ASSETS
P30 P42
for their livelihoods. Though the country has made rapid strides in
technology, particularly, Information Technology, farming is done still the
same old way, resulting into lower productivity and profitability for the
cultivators. About 60 per cent of the country’s cultivated area is rain-fed
and depend mainly on rainfall, which has been nothing but erratic. Issues
like global warming, higher input costs, are posing further challenges
to farmers. Growing population, rapid urbanization, changing lifestyles,
growing shift to bio-fuels, etc., they have all been ensuring that supplies
continue to struggle to keep pace with the rising demand.
Given the plethora of challenges facing the sector, there is a need for find-
ing solutions that could not only address new and emerging challenges,
but which could also have long-lasting impacts. Improving productivity
is one solution with GM crops offering a ray of hope, but there is a need
to look for more, and perhaps, better alternatives. Against this backdrop,
‘Climate-Smart Agriculture’ emerges as the answer to the problems af-
fecting the agriculture sector in the country. The World Bank defines Cli-
mate-Smart Agriculture (CSA) as an approach to managing landscapes—
cropland, livestock, forests and fisheries—that aims to achieve three
outcomes: Increased productivity; Enhanced resilience (reduce vulnerabil-
ity to drought, pests, disease and other shocks; and improve capacity to
adapt and grow in the face of longer-term stresses like shortened seasons
and erratic weather patterns); and, Reduced emissions.
The results are already visible. In Haryana, for instance, where this latest
technique was introduced five years ago, despite the slow adoption rate,
the farmers who have adopted the climate-smart way are benefitting in
terms of higher yields, better crop-mix and lower input costs including
lower water consumption. CSA approach, according to a Inter Press
Service report, not only enables lower input costs including lower water
consumption, but also allows to grow better crop-mix (for example,
four acres of maize needs only a fifth of the water required for paddy).
It also emphasizes on direct seeding instead of sapling transplantation,
thus doing away with high labour costs and a week of standing water
to survive; besides it also eliminates threat of vulnerability to floods and
strong winds due to a weak root system.
Citing examples of farmers implementing CSA technique, the report says
that the new method also gives shorter-cycle harvests and vegetables
are grown as a third annual crop, translating into higher income for the
farmer. These farmers also use technology like the laser land leveler,
which produces exceptionally flat farmland, which ensures equitable
distribution and lower consumption of water, and other tools like the
Leaf Colour Chart and GreenSeeker which help farmers assess the exact
fertilizer needs of their crops. Text and voice messages received on
their mobile phones about weather forecasts help them to time sowing
and irrigation to perfection. While adoption to this technique is slow,
expectedly though, there is a need to create greater awareness and
provide handholding to farmers, especially small and marginal ones,
given the enormity of challenges.
Editorial Director
‘Climate-Smart Agriculture’ could be the answer

SMS “HOME” TO 567676
SMS “CAR” TO 567676
P12 Largely On Track With
Fulfilling Poll-Time Promises
P14 Low Demand, Not Policy,
Biggest Problem for India Inc
FINANCIAL SERVICES
P30 My name is Insurance and I am
not an Investment
P32 Managing Stressed Assets -
The rule, “Prevention is better than cure” is
equally applicable in the case of credit portfolios
of banks, as it is for the maintenance of our own
health.
P58 LIC unveils new policy
REALTY SECTOR
P26 Real Estate Report Card
9 Impressions Indian Real Estate Stakeholders
Have about Modi Government - And JLL’s Take.
P34 Is Your Home Safe From
Earthquakes?
Over the years, increasing concerns about
earthquake resistance have led scientists
and engineers to invest R&D resources and
considerable funding into methods to make
modern buildings earthquake proof.
1The Global AnAlyst | JUNE 2015 |
A N E X C L U S I V E M O N T H L Y O N B U S I N E S S & F I N A N C E
June 2015
Volume 4 Issue 6
MODIVERSARY
Modi
Government
delivers, but
needs to do
lot more
SPECIAL ISSUE
100
MAKE IN INDIA
What Can Make it
Happen?
AGRICULTURE
Can mobile phone
services be an
agent of change?P6
SUSTAINABLE LIVING
Carbon Footprint
P54
MANAGING
STRESSED ASSETS
P30 P42
EXECUTIVE SUMMARY
P52 Low oil prices &
monetary easing triggering
modest acceleration of
global recovery
Low oil prices and monetary easing are
boosting growth in the world’s major
economies, but the near-term pace of ex-
pansion remains modest, with abnormally
low inflation and interest rates pointing to
risks of financial instability.
PERSPECTIVE : E-COMMERCE
P36 Myntra’s Mantra - App-only
Platform : But, Can it be the New
Holy Grail?
Myntra’s, India’s largest online fashion store,
decisiontoembracethemobile‘app-only’model
doesn’t sound too convincing, notwithstanding
the hype surrounding its latest platform.
BANKING : EARNINGS SEASON
P38 State Bank of India
P40 Punjab National Bank
P40 Syndicate Bank
P41 Oriental Bank of Commerce
P42 State Bank of Hyderabad
ENVIRONMENT & YOU
P44 Sustainable Living : How
Ecova Reduced its Carbon
Footprint by 1.49 per cent
P45 PepsiCo’s Safe Water
Network
How the F&B giant is delivering access to safe
water?
COVER STORY
P8 MODIVERSARY
Modi Government delivers, but
needs to do lot more
As Modi Government celebrates its first year
in office, comparisons, criticisms, accolades and
admirations have been pouring in from across
the country. While PM Modi has delivered on
3G: Governance, Growth and Growing Global
Presence (of India), his government faces a slew
of challenges as it enters its second year in office,
with the biggest being creating large-scale jobs
and reviving rural economy.
REGULARS
P50 BUSINESS BRIEFS
P56 BOOKSHELF
CORPORATE WORLD
P46 Junna Solar Systems -
Harnessing Solar Power
CONTENTS
INSIGHTS
P54 AGRICULTURE : Can
mobile phone services be an
agent of change?
Yes, says a Vodafone study which identifies
six mobile services with the potential
to transform Indian farmers’ lives and
livelihoods. The report claims that these
services could increase an estimated 60
million Indian farmers’ annual incomes by an
average of US$89 a year in 2020.

The government’s role as building the arena for the
‘Make in India’ initiative, defining the rules of the game,
and constructing the infrastructure (physical and digital)
would be critical, going forward.
SHASHANK TRIPATHI,
PwC Strategy Consulting Leader
‘MAKE IN INDIA’ What Can Make it Happen?
BUSINESS ENVIRONMENT

TGA
MAKE IN INDIA
P
wC recently launched a marque thought lead-
ership “Future of India – The Winning Leap”
where we set out to understand what it would
take for India to increase its GDP by 9 per cent
per year to become a 10-trillion-USD econo-
my over the next two decades. The last electoral man-
date for development was a more immediate signal of
India’s desire for growth and for the benefits of growth
to be extended to all members of society. A 9 per cent
GDP growth rate with a per capita income rising from
US$1,500 to just under US$7,000 per year will boost qual-
ity of life for more than 1.25 billion citizens. This would
be the largest national development effort any democ-
racy has ever attempted.
One of the most significant campaigns initiated by the
new Government has been the ‘Make in India’ initiative,
which seeks to position India as a best-in-class manu-
facturing destination, supplemented by all the support
systems and investments necessary to make it a practical
reality. A key point that Prime Minister Narendra Modi
stressed at the time of launch was the need to restore the
faith of the home-grown industrialists to invest in India.
Additionally, the campaign was also originally devised
to help guide foreign investors on all aspects of regula-
tory and policy matters along with facilitation in approv-
als and clearances.
Unblocking Bottlenecks
However, as history suggests, India, has a reputation of
being a difficult market in which to do business. Invest-
ment plans are often abandoned, not because the idea
lacks merit but because the business environment pres-
ents too many barriers. Regulations for tax compliance
and audits, along with labor laws and constantly chang-
ing government policies, create unnecessary complex-
ity. India has historically performed poorly on various
benchmarks gauging the business environment, as indi-
cated by the World Bank’s Ease of Doing Business rank-
ing. Currently, India ranks 142 out of 189 countries, be-
low countries such as Indonesia, Brazil, and China. The
reasons for its poor performance are straightforward: un-
necessary costs, the difficulty of complying with complex
regulations, and frequent delays in regulatory decisions.
Areas such as starting a business, paying taxes, and en-
forcing contracts significantly depress India’s overall
ranking.
For instance, contract risk, in India, is a problem that cas-
cades through the larger economy. One of its repercus-
sions is that companies often have difficulty quantifying
the risk of their business relationships. New businesses
must go to extraordinary lengths to prove that they
would be a reliable partner, an effort that often hampers
their growth and expansion. Complex business activities
that require multiple, interlinked commercial agreements
have also become substantially riskier. In the modern in-
dustrial supply chain, there may be hundreds of service,
maintenance, delivery, and other agreements between
numerous companies. One minor dispute that rapidly
escalates could be enough to disrupt all other companies
along the supply chain. Without any guarantee that this
dispute could be readily resolved, the disruption could
extend for years, destroying value for all involved. This
is just one example of how India’s business environ-
ment puts the country at a clear disadvantage relative to
other countries it competes with for foreign investment.
Through ‘Make in India’ initiative, the Government
could look to support an economic system that contrib-
utes to development while promoting fair and effective
regulation that conforms to the nation’s unique business
and social climate.
Learning from a few Manufacturing Success Stories
Our research indicates that the countries which have
boosted their per capita GDP have done so by making
the shift in focus from low to high-tech industries. Take
South Korea, where the per capita GDP grew 20-fold
from 1963 through 2013. The nation achieved this growth
in part by developing the manufacturing capabilities es-
sential for high-tech industries, which now dominate its
manufacturing landscape. Our analysis shows that val-
ue-added manufacturing can grow to 20 per cent by 2024
and to greater than 25 per cent in 2034 if India can step up
its manufacturing competitiveness.
Besides removing the regulatory hurdles, strengthening
manufacturing skills training will also prove crucial. Im-
porting foreign technology can help Indian manufactur-
ers strengthen their capabilities that will help achieve the
true potential of the Make in India campaign. This has
to be augmented by stepping up investments in R&D,
which will have to grow from its current 0.8 per cent to
2.4 per cent of the GDP in 2034 to achieve the desired
gains. Growth can also be pushed through improvements
in labor productivity that translate from domestic re-
forms and through opening up of the economy to foreign
participation – which encourages technological spill-over
from international markets to India. To achieve such un-
precedented growth, the country may need to increase its
annual investments to six times the figures in 2014, while
the amount of FDI flowing into India would have to more
than double as a percentage of GDP by 2034.
Critical Factors
The global community has viewed India through the
twin lenses of admiration and skepticism — admiring
this vast nation for its democratic values and cultural
heritage while expressing concerns about pervasive cor-
ruption, fickle business rules, and slow pace of change.
“Make in India” is one of the pioneering initiatives that
aims to marshal and channelize India’s resources toward
a common vision and purpose. The government’s role
as building the arena for the “Make in India” initiative,
defining the rules of the game, and constructing the in-
frastructure (physical and digital) would be critical go-
ing forward. While the government will create the envi-
ronment for this achievement; the private sector should
shoulder responsibility for generating and executing the
vision within that environment.

As Modi Government celebrates its first year in
office, comparisons, criticisms, accolades and
admirations have been pouring in from across
the country. While PM Modi has delivered on
3G: Governance, Growth and Growing Global
Presence (of India), his government faces a slew
of challenges as it enters its second year in office,
with the biggest being creating large-scale jobs
and reviving rural economy.
COVER STORY
MODIVERSARY
Modi Government
delivers, but needs
to do lot more
The Global Analyst | JUNE 20158

1YEAR OF
MODI GOVT
O
n May 16, Prime Minister Narendra Mo-
di-led NDA government completed a
year in office. It was exactly a year ago
that riding on the Modi wave, BJP and its
allies swept the Lok Sabha elections, reg-
istering a massive victory. Indeed it was the charisma
of Modi which helped BJP romp home, securing an ab-
solute majority in the Lok Sabha 2014 elections with a
tally of 282 seats, thereby also becoming the first politi-
cal party to achieve this feat in the last 30 years. Modi
factor was at work again as the BJP won elections in key
states of Maharashtra, Jharkhand and Haryana, besides
it also successfully formed a coalition government in
J&K, another first for the party. If the rise of Modi to
the centre stage of the national politics was dramatic,
his soaring popularity, first on the national stage, and
then in the global arena, has been equally amazing. In
fact, his growing stature as the world leader has been
nothing short of phenomenal to say the least.
Lifting sentiment, reviving economy
While a year is too short a period to evaluate a govern-
ment’s work, especially when it also happens to be the
very first year in office, yet, there is absolutely no doubt
that the Modi government has done a remarkable job in
many areas. When PM Modi took the reins of the gov-
ernment at the centre the economy was in bad shape.
In the previous two years before the NDA government
came to power in May 2014, the economic growth was
stand pressure amidst a surging dollar, which has been
gaining against most international currencies in re-
cent times, and lower inflation too provided the much
needed succor to the government to push its reforms
agenda, they in no way take away the credit from the
government for the massive efforts it has put in, and
which are still under way, to lift the sentiment and re-
vive the economy, initiate timely measures to improve
situation in the hinterland and help farmers who have
been hit hard by the recent bad weather conditions in-
cluding unseasonal and uneven rains, and hailstorms
in several parts of the country, besides taking several
steps to ensure that Bharat (rural India) grows along
with (urban India).
But Modi is awaiting a bigger test as fears of poor mon-
soon this year loom. Prices of food grains, fruits & veg-
etables have already firmed up, making many of the
food items beyond reach of poor and needy. Whatever
official inflation indices suggest, the fact of the matter is
that common man is already bearing the brunt of surg-
ing food prices and the government needs to come out
with remedial measures without wasting any further
time. In fact, it also needs to take some robust measures
in strengthening storage, pilferage-proof transportation
and effective distribution of food items through PDS.
Social security schemes, a huge success
One program that needs special mention for its remark-
able work is social security, or financial inclusion. The
below par, with the GDP registered
recording two successive years of
below 5 per cent growth – first such
instance of longest spell of below
par growth in the last 25 years. In
contrast, the Indian economy has
grown at 7 per cent plus rate in the
last two quarters – September and
December – and is expected to re-
peat the feat in the March quarter
as well, which has also prompted
many international organizations
such as IMF, World Bank and
Moody’s to forecast the Indian
economy growth to even surpass
that of China, the world’s fastest
growing economy so far in the last
several years. The miraculous turn-
around in the Indian economy is at-
tributed to the strong reforms push
of the Modi government.
While his government has ben-
efitted from factors such as lower
international crude oil prices for
most of the second half of 2014 and
early 2015, stronger foreign portfo-
lio inflows into the domestic capital
market, which helped rupee with-
Source::niticentral.com

MODIVERSARY
Modi government has also em-
barked on an ambitious social secu-
rity program or financial inclusion
mission to take banking/financial
services to the door steps of the com-
mon man, the unbanked people in
the form of nation-wide campaigns
such as PMJDY (Pradhan Mantri
Jan-Dhan Yojana), PMJJBY (PRAD-
HAN MANTRI JEEVAN JYOTI
BIMA YOJANA), PMSBY (Pradhan
Mantri Suraksha Bima Yojana), and
Atal Pension Yojana (APY), which
have been huge successes so far.
Though critics have been quick
to question the successes of these
schemes, with major criticism be-
ing that a majority of the accounts
opened under PMJDY have hardly
seen any transactions or are lying
dormant, post-launch, the question
is – can government be questioned
for the non-transaction or non-
maintenance of those accounts?
The Modi government has indeed
done a commendable job of tak-
ing these services to the common
man in perhaps no time since tak-
ing over. And it is expected that
his government would also take
appropriate steps to address the
concerns raised in some quarters in
due course of time. Further, there
is a need to improve the quality of
service to customers at these finan-
cial services organizations to help in
customer retention, besides encour-
aging more people to benefit from
these programmes. The govern-
ment has also done good work in
the area of subsidy reforms. Thanks
to the DBT (Direct Benefit Transfer)
scheme, it has been able to ensure
to a great extent that the benefits of
subsidy reach the intended benefi-
ciaries. Its effort in asking rich and
influential to give up subsidy on
their LPG connections is also a wel-
come move. But where Modi gov-
ernment earns more appreciation
is its efforts in instilling confidence
among foreign investors.
Indeed, it’s the Modi effect that has
seen a number of global corpora-
tions lining up investments in a
big way. Be it PM Modi’s vision of
promoting India as a global manu-
facturing hub with the launch of the
famous ‘Make in India’ campaign,
or Digital India, or his Smart Cit-
ies project, or his hugely popular
Swachh Bharat Mission, these pro-
grams are not mere slogans but are
well-articulated, well thought-out
initiatives aimed at making India a
world leader, which also have the
world sit and take notice. The NDA
government at the centre has also
done well when it comes to improv-
ing India’s ties with key interna-
tional allies including its neighbor-
ing nations.
Improves governance, yet more
steps needed
Modi government’s biggest achieve-
ment, however, is in the area of gov-
ernance, though, there is still a lot
needs to be done to ensure an open,
effective and accountable adminis-
tration. An important step for Good
Governance, Modi had said in one
of his addresses, is simplification
of procedures and processes in the
government so as to make the entire
system transparent and faster.
In a speech he made last year on
December 25th, which his govern-
ment declared as ‘Good Gover-
nance Day’, the PM said that initia-
tives like new web portals mygov.in
and interact with the PM to reach to
the people directly, which evoked
unprecedented response, “places a
large responsibility upon us, and I
assure you, my countrymen that we
will not let you down”. “The effort
to usher in an era of Good Gover-
nance has just begun, and begun on
Source::mintSource::mint

1YEAR OF
MODI GOVT
a very promising note. An open and
accountable administration is what
we had promised to deliver and we
will do so,” Modi assured. Howev-
er, it needs to be reiterated that one
year is too short a time to assess the
success of many big-ticket measures
launched by the government in its
first year in office, and that it needs
to be given some time for effectively
delivering on the same. Programs
like Make in India and Digital India
need massive efforts, investments
and conducive climate.
Global geo-political developments
such as Greece Crisis and troubles
in Euro Zone, the expectations of
withdrawal of the quantitative eas-
ing, which is stoking fears of a rate
rise in the US by the end of the year,
ongoing tensions between Russia
and Ukraine and other parts of the
globe, besides fears of a rise in in-
ternational crude oil prices present
formidable challenges to the gov-
ernment. Besides, And then there
are challenges on the domestic front
as well. Forecast of a below average
monsoon does not augur well for
the economy.
A below normal monsoon could
only worsen situation for the ag-
riculture sector and hence rural
economy, which could make the
job of the government tougher as
it’s working hard to rein in infla-
tion, particularly food inflation. It
goes without saying that contain-
ing inflation along with job creation
remain two major challenges before
the Modi-led NDA government at
the centre.
The government also needs to step
up efforts to create more jobs, which
will require it to kick start industrial
growth in the country, by bringing
in fresh investments, by way of cap-
ital formation, by boosting exports,
and so on. Its focus on skill develop-
ment must be supported by creation
of jobs opportunities for the youth
and the unemployed.
Another area that needs immedi-
ate attention is social-sector spend-
ing. It’s worrisome that social-
sector spending as a percentage of
the gross domestic product (GDP)
has been in a decline, falling to its
lowest levels since 2010, suggests a
report in business daily Mint. The
government needs to take correc-
tive measures, giving it (the issue)
a top priority. Education sector is
another segment which needs ur-
gent action on part of the central
government. The paper further re-
ports that spending on education
sector has fallen below 3 per cent
of GDP, including food subsidies.
It’s much below the 6 per cent level
promised by his party in its election
manifesto.
It’s time for bold measures
There is no doubt the Modi gov-
ernment faces the challenge of
‘outsize expectations’, however,
it must make efforts not to get
bogged down by the same, look
beyond mere sloganeering, and
instead focus on introducing bold
reforms, taking steps to revive ru-
ral economy, increase spending on
infrastructure including social in-
frastructure development, and de-
livering the goods which reach and
benefit the common man.
The NDA government at the centre
faces a slew of challenges as it en-
ters its second year in office, with
the biggest being creating large-
scale jobs and reviving rural econ-
omy. Surely, the second year in of-
fice could be a make or break year
for the Modi government.
Source::niticentral.com
Ushering in Reforms
India is embarking on ushering in game-changing reforms through the use of Jan Dhan, Aadhar and Mobile (JAM), a
unique combination of three to implement direct transfer of benefits. This innovative methodology will allow transfer
of benefits in a leakage-proof, well-targeted and cashless manner. There would be cut in subsidy leakages but not in
subsidy themselves. NDA Government has built a national consensus and introduced a Bill to amend the Constitution to
implement the Goods and Services Tax (GST). The GST will put in place a state-of-the-art indirect tax system by 1st April,
2016. This will create a unified and common domestic market by replacing a confusing array of taxes and preventing
their cascading effects.
The Government has started a unique scheme called Sansad Adarsh Gram Yojana, encourage MPs to take ownership
of a village in their constituency and develop this as a model village. It motivates parliamentarians to ensure holistic
development of their constituency rising above specific schemes. The Government has approved the MoPNG proposal to
supply pooled Natural Gas at uniform delivered price to all grid connected gas based fertilizer plants for urea production.
It has also approved the scheme for utilization of stranded gas based power generation capacity which was a joint
proposal from MoPNG and Ministry of Power and will help in revival of 16000 MW stranded gas based power plants.
TGA
Source::narendramodi.in

Largely On Track With Fulfilling Poll-Time Promises
As the Modi Government completes its first year in office, there is no dearth
of bouquets and brickbats for the NaMo regime in the media. On analysing
the Modi government’s electoral assurances, the actions taken so far and the
respective timelines being followed to achieve these, I would say that it is
reasonably on track with fulfilling its short-term, medium-term and long-term
promises.
I
mportantly, the continuation of the previous
government’s policies like Land Acquisition
and Rehabilitation and Resettlement
(LARR) Bill, Real Estate (Regulation and
Development)Billwillhavesignificantimpact
on the real estate industry once these are passed
by the Parliament. India’s historically opaque real
estate sector will move towards more transparency
with the introduction and implementation of these
key policies.
It is worthwhile to reflect on the grassroots-level
transformation we can expect to see when:
• Millions of home buyers in towns and cities
and farmers across the country (the latter being
landowners affected by infrastructure projects)
are empowered with the clauses in the real
estate regulatory bill and LARR
• Investment opportunities in office spaces open
up for small retail investors thanks to REITs
• The quality of life of millions of Indian citizens
is upgraded when the proposed 100 smart and
sustainable cities come to life.
• ‘Benami’ transactions, which have for the
longest time been a bane of the real estate
sector, are eliminated
Let us take a look at the progress on some of
the promises Narendra Modi’s party made in
its electoral manifesto. Specifically, we will
isolate promises which have direct bearing on
enhanced governance and reinforced democratic
fundamentals, which are important for India’s
development and future-readiness:
Promises On Track
Transparency: Re-auctioning of coal blocks earned
the government huge revenues
Efficiency: Real-time effort towards rendering
the existing institutional frameworks more
efficient; a good example being the change in Food
Corporation of India’s food procurement and
storage mechanisms.
Productivity And Accountability: Narendra Modi
has been directly involved in monitoring and
raising the productivity as well as efficiency of his
ministry officials. He is clearly bucking a chronic
trend of bureaucratic unavailability and aiming to
increase public access to government officials
Black Money: The Black Money Bill has given a
moratorium period to bring back unaccounted
money into the system by paying normal tax.
The ongoing dialogue with the Swiss financial
authorities to disclose secret accounts of Indians
abroad is reaping results
Corruption: Wired (online) transactions are now
being encouraged for property transactions. This is
a major step forward for curtailing black money in
the sector
Investor Confidence: Market confidence has
improved with the strengthening of the Indian
equity, debt, currency markets and equal tax
regime that was promised to both domestic as well
as international investment companies
Positioning India: Via a series of international
tours, the PM is helping India rid itself of its anti-
MODIVERSARY
ANUJ PURI,
Chairman and Country Head at JLL India

investor image and is opening up new avenues
of foreign business in India, especially under the
‘Make in India’ campaign
Decentralisation And Cooperative Governance
• Gradual increase in the financial autonomy of
states
• Farmers get real-time information on Minimum
Support Price through digital channels and
Kisan TV. Drastic price movements have
been largely under control. A focus on citizen
outreach programmes as well as leveraging
social media have bought people closer to the
governance process.
Promises That May See Progress Soon
• States with similar problems will be able to form
councils under Niti Aayog to discuss common
concerns
• Niti Aayog, along with other national agencies,
will help individual states in mobilisation of
resources.
Promises That Saw Little Or No Progress
Relaxing clauses in the Land Acquisition and
Rehabilitation and Resettlement Bill (LARR), Real
Estate Investment Trusts (REITs) and Foreign
Direct Investment (FDI) policies that investors find
difficult to follow
• Increased credit facilitation to start-ups
• Initiation of employment exchange programmes
with other countries
• Obsolete laws to be scrapped or modified
• Online dissemination of court cases for better
monitoring and creation of specialised courts to
fast-track delivery of justice.
In short, the Modi Government has a fairly balanced
list of hits and misses so far. The trend does seem to
lean more towards action than inaction. It definitely
seems that Modi has every intention of living up
to the larger part of his electoral promises in the
future.
I agree with Reserve Bank of India (RBI) Governor
Raghuram Rajan when he says that the expectations
from the new government when it came to power
last year were ‘probably unrealistic’, and that it
has in fact taken steps to create an environment for
investment and is sensitive to concerns of investors.
Industry Inc. CEOs Praises Modi Government’s First Year
In its first year, the Government led by Prime Minister
Narendra Modi has turned around investor sentiment
and taken strong action across multiple sectors for
scripting a new growth narrative.
- Chandrajit Banerjee, Director General, CII
Modi government has been successful in putting India
on the global map for investment.
- Tulsi Tanti, Chairman, Suzlon Group
The government in the past year has taken unprecedented
and innovative steps of a scale that could not have been
envisaged earlier. They have succeeded in changing the
economic calculus of the country by demonstrating that
120 million bank accounts can be opened at short notice
or 4 lakh toilets can be built in schools in a year and so on.
- Adi Godrej, Chairman, Godrej Group
The government under Mr Modi has been moving
steadily and purposefully in creating a climate where it
is easy to do business. We have to give them enough time
and have patience. Rome wasn’t built in a day!
- Venu Srinivasan, Chairman & MD, TVS Motor
We are highly encouraged by the series of actions and
policy reforms taken by the government in the last one
year. The government has been successful in improving
the state of the economy and setting the foundation for
long term higher growth and development.
Several path-breaking measures have been announced,
notably the introduction of social security net for all
citizens, rationalisation of corporate tax rates and
implementation of GST by April next year.
- Jyotsna Suri, President, FICCI
The government has exceeded our expectations and has
achieved more in the first year than any other government
has achieved in their first year. The government’s
emphasis on lower tax rates and introduction of GST in
coming year will greatly enhance competitiveness of the
Indian industry
- Sumit Mazumder, President, CII
Reformssofarannouncedshouldseetheirimplementation
on ground level so that ease of doing business at
grassroots is further facilitated. The coordination of the
Centre with states needs to be cemented for which the
central government alone has to take a call.
- Alok B Shriram, President, PHD Chamber
The NDA administration has its ears to the ground and
knows well what needs to be done, but what it lacks is
the acumen for execution. For instance, it knows that
governance is an issue for public sector banks, which
account for 70 per cent of the banking industry’s assets,
and this is why it has split the top post between a chairman
and a managing director to avoid concentration of power,
but it has not been able to appoint any chairman so far. -
Tamal Bandyopadhyay, Consulting Editor, Mint
1YEAR OF
MODI GOVT

LOW DEMAND,
NOT POLICY, BIGGEST PROBLEM FOR INDIA INC
Building blocks being put in place to raise India’s potential-growth rate, says
CRISIL. Investment cycle unlikely to restart soon; growth recovery will be a
slow process. CRISIL released ‘Modified Expectations’, a report on May 18,
2015, evaluating the economy-related performance of the Narendra Modi-led
government as it completes one year in office.
Guided by the principle of Antyodaya our government is dedicated to the poor,
marginalised and those left behind. We are working towards empowering them
to become our soldiers in the war against poverty. Numerous measures and
schemes have been initiated: from making school toilets to setting up IIT’S, IIM’S
and AIIMS. From providing a vaccination cover to our children, to initiating a people
driven swachh bharat mission; from ensuring a minimum pension to our labourers
to providing social security to the common man; from enhancing support to our
farmers hit by natural calamities to defending their interests at WTO.
- Narendra Modi, Prime Minister
MODIVERSARY

T
he report assesses India
Inc’s performance in
the first nine months of
fiscal 2015 using unique
metrics of demand, debt
and policy. The findings belie some
popular narratives. It highlights how
the government is putting in place
building blocks that will improve
India’s crucial potential-growth rate,
and explains why it will take longer
than expected for the investment cycle
to kick-start.
CRISIL analysed the results of 411
companies from the National Stock
Exchange’s CNX 500 index (excluding
those from the BFSI and oil & gas
sectors), which together account for 90
per cent of the market capitalisation of
the bourse. We compared revenue and
operating profit growth with nominal
GDP growth (it was 12 per cent in
2014-15), which showed that 69 per
cent – or 285 companies out of 411 –
underperformed.
Says Prasad Koparkar, Senior Director,
CRISIL Research: “Our findings
are telling. For more than half the
companies that underperformed,
the main obstacle was poor demand.
That flies in the face of the refrain that
policy is the biggest bottleneck. Policy
was only the No. 3 factor according to
our study, affecting just 15 per cent of
the companies analysed.”
‘Modified Expectations’ blends
CRISIL’s unique expertise in macro-
economy, corporate and banking
research, and credit ratings to offer a
360-degree view on India. It uses four
metrics to evaluate the government:
What has worked so far; where are the
signs of a pick-up; what hasn’t worked
so far; and what lies ahead.
The report underlines a host of steps
that the government has taken or
is taking to address constraints –
specificallystructural–togrowth.This,
we believe, will ensure that growth
sustains beyond fiscal 2016. But major
reforms will remain a tough task given
the government’s lack of support in
Rajya Sabha, and the government will
have to show exceptional statecraft to
cobble up consensus to pass crucial
Bills.
Given this, CRISIL believes growth is
on a slow grind up in the short term,
and will touch 7.9 per cent in 2015-16 if
monsoon is normal; else it would flat-
line at 7.4 per cent.
Says Dharmakirti Joshi, Chief Econo-
mist, CRISIL: “The government can’t
push demand up in the short term be-
cause there is no monetary and fiscal
silver bullet. We expect private con-
sumption to pick up only gradually
this fiscal, which, in turn, will provide
some impetus to demand. But it won’t
be enough to lift extant capacity utilisa-
tion to levels where the private corpo-
rate investment cycle needs to be kick-
started again. A meaningful recovery
in capex is not seen till fiscal 2017.”
In the interim, CRISIL believes
the government has to pick up the
1YEAR OF
MODI GOVT

Why it will be a slow grind up?
gauntlet and try to
push the investment
cycle through public
investments. The Union
Budget for the current
fiscal does propose a
more than 50 per cent
jump in public spending
in infrastructure.
On the legislative side,
consensus is necessary
to push through leg-
islations on Goods &
Services Tax and land –
without much dilution.
This will test the gov-
ernment’s resolve and
statecraft, but they are
critical building blocks
that will raise India’s
‘potential-growth’ rate.
We also look forward to
steps that re-kindle agri-
culture growth and ame-
liorate distress in farms.
India badly needs dura-
ble solutions to improve
farm productivity and
the government needs
to sustainably address
distress through crop in-
surance schemes rather
than loan waivers. The
budget for the current
fiscal had announced a
lot of reforms with far
reaching implications
for infrastructure, finan-
cial sector and taxation.
Progress on these will be
a key monitorable.
W
hen the Narendra Modi-led National Democratic Alliance came
to power with a resounding majority last year, it had inherited a
frail economy. Twelve months on, the macros are looking better,
growth is inching up, inflation has tempered and current account
deficit is in the safe zone.
Feverish speculation about big-bang reforms and a quick turnaround in the
economy are getting the deserved reality check. The recent rise in crude
oil prices, possibility of a weak monsoon amid rising rural distress, and the
parliamentary logjam over two critical pieces of legislation – onland acquisition
and Goods & Services Tax - are also helping rationalise expectations.
Winding back, the main reasons for a sharp slowdown in India’s growth since
2012 were the discontinuation of stimulus to rein in rising fiscal deficit and
inflation, and policy paralysis that slowed decision making and made it difficult
to do business.
The Modi government is addressing policy paralysis by energising the
bureaucracy, fasttracking decision-making, and enhancing the ease of doing
business. This will create enablers for growth, but cannot push demand up in
the short term. There is no monetary and fiscal bazooka at hand either – which
is also because of the legislative mandate to bring down fiscal deficit. And
monetary policy turned mildly favourable only this year.
In other words, there is little that can be done to engineer a quick revival in
demand. That’s exactly why corporates are shy of undertaking fresh investments,
MODIVERSARY

as the report show the analysis of the results of CNX 500 companies in the first
nine months of fiscal 2015 in the following analysis.
The study reveals that private corporate investments picking up only in fiscal
2017. This lack of demand is also reflected in low utilisation of capacities.
Net-net, we believe demand will pick up only slowly. And as is the typical
progression in such a milieu, consumption demand will improve first, which
then will trigger investments.
Independent studies done by CRISIL Research and CRISIL Ratings conclude
similarly on the outlook for consumption-driven sectors. CRISIL Research data
show consumption-linked sectors have done better than investment-linked
ones in the last fiscal and will continue to do so in fiscal 2016 as well. CRISIL
Ratings’ data on upgrades and downgrades confirm the relative strength of
consumption-linked sectors compared with investment-linked sectors. Yet
capacity utilisation will be slow to pick up.
As for major reforms, given the lack of numbers in Rajya Sabha, It believe the
government will have to show exceptional statecraft to cobble up consensus to
pass the Bills. These are reasons why we believe India is on a slow grind up.
The report evaluated the Modi government’s one-year performance using four
metrics: What has worked so far, where are the signs of a pick-up, what hasn’t
worked so far, and what lies ahead.
The study blends in CRISIL’s unparalleled expertise in macroeconomic, industry,
corporate and banking analysis, to offer a 360-degree view on India.
The key findings are:
1YEAR OF
MODI GOVT

What has worked?
• The government has not been able
to effect a quick turnaround in
the economy but has made prog-
ress in putting in place building
blocks needed to raise India’s
potential growth. Initial steps
at improving transparency, en-
hancing the ease of doing busi-
ness, improving the efficiency of
the goods and labour markets,
and financial sector reforms will
pave way for higher growth over
the medium run
• Prudent tactical moves have
helped keep a tab on inflation
even in the bad monsoon year
of 2014. Restraint in increasing
minimum support prices and
release of food grain stocks into
the market have helped kept
food inflation under control and
allowed RBI to cut interest rates
Where are the signs of pick-up?
• Credit ratio, or the ratio of up-
grades to downgrades, is ticking
up
• Business and consumer confi-
dence is also looking up
What has not worked?
• Difficulty in arriving at a consen-
sus carries the risk of delay and
dilution of key legislations such
as the Land Acquisition Bill and
the Goods & Services Tax (GST)
Bill
• Inability to use policy tools such
as interest-rate cuts and fiscal
spending to stoke demand
• Inability to revive manufacturing
and address enhanced rural dis-
tress
• Our study of CNX500 companies
shows that while regulatory is-
sues and high leverage constrain
corporate performance and in-
vestment decisions, lack of de-
mand is the singlebiggest factor
holding back private-sector in-
vestments
What lies ahead
• Our analysis shows that con-
sumption will lead the invest-
ment cycle. Lower food and fuel
inflation and reduction in inter-
est rates will support private
consumption. Industry-level
granular findings confirm the
strength of consumption-linked
sectors over investment-led sec-
tors. Credit ratings data, too,
show that consumption-linked
sectors enjoy higher upgrades
than investment-linked sectors
• With a gradual pick-up in con-
sumption demand and public
investments in select infrastruc-
ture sectors, private investment
activity should revive by fiscal
2017
• We expect GDP growth to grind
up to 7. per cent, inflation to
come down to 5.8 per cent and
current account deficit at 1 of
GDP in fiscal 2016, given a nor-
mal or near-normal monsoon
What has worked so far
• Macro-economic indicators have improved
• Short-term issues that needed fixing are fixed
• Early steps taken to improve infrastructure and institutions
Macros are improving gradually
Over the last one year, several steps
have been initiated to unshackle
binding constraints to growth.
The government has cleared many
infrastructure bottlenecks, speeded
up decisionmaking, fast-tracked
project clearances, cut red tape and
sorted out mining issues. These
steps, and the fortuitous kicker from
a slump in global crude oil prices
and the commodity complex, have
engineered a moderate turnaround
in the economy. Low oil prices have
helped rein in inflation and tamed
the beast of twin deficits – fiscal and
current account.
Consequently, GDP growth
increased to 7.4 from 6.9 per cent in
fiscal 2014, while inflation dropped
to 6 from 9.5 per cent, and CAD and
the government’s subsidy burden,
both nearly fell by 50 basis points as
a percentage of GDP, with the latter
helping fiscal consolidation. And
after a sweatinducing lag, monsoon
caught up a lot last year to prevent
sharp spikes in food prices.
Steps taken to raise India’s
‘potential-growth’ rate: For long-
term well-being, a country needs to
raise its ability to grow faster without
creating inflationary pressures. This
is its ‘potential-growth’ rate. There
are many factors that combine to
increase the potential-growth rate
and one of the important ones is
competitiveness.
The World Economic Forum’s Glob-
al Competitiveness Index (Chart 1)
shows India’s competitiveness has
been continuously eroding in the last
six years. Specifically, India ranks
poorly in institutions, infrastructure,
macroeconomic environment, health
and primary education and the effi-
ciency of its goods and labour mar-
kets.
Our assessment shows that the Modi
government has identified the ma-
jor issues correctly and put in place
some crucial building blocks, but it
will have to do a lot more. The chal-
lenge will be to stay the course yet
step on the gas, and get corporates
to hitch their wagon to the govern-
ment’s star.
MODIVERSARY

Improving India’s Competitiveness
We use the World Economic Forum
(WEF) rankings and methodology
rooted in Michael Porter’s The
Competitive Advantage of Nations
(1990) on the stages of development
and benchmark India’s growth
potential/ competitiveness versus
competitors. As per the WEF, the
Indian economy is still in the factor-
driven stage, and needs to transit
from agriculture to manufacturing.
For the sixth consecutive year,
India’s ranking on the WEF Global
Competitiveness Index saw a decline
in fiscal 2015, and was the lowest
among BRICS nations. Out of 144
countries, India ranks 71 on the
overall index, 92 on factor-driven
parameters, 61 on efficiency-driven
parameters and 52 on innovation
and sophistication parameters.
While we rank high on innovation
(49) and business sophistication (57),
we are far behind our competitors
on the efficacy of institutions,
infrastructure, macroeconomic
environment and health and
primary education. These are critical
for pushing our competitiveness in
the factor–driven parameters and
for making manufacturing India’s
growth engine. It is imperative,
therefore, to improve our building
blocks.
What has been done to raise
India’s competitiveness? The Modi
government has announced a slew of
measures since taking the reins a year
back. We analyse what these steps
amount to in terms of improving
India’s potential growth. We use the
likeness of a speedometer to gauge
the performance so far – the needle
is the starting point and the arrow
indicates the direction and extent of
reforms.
Institutions
Efficiency of labour market
InfrastructureInfrastructure
WEF Ranking, Fiscal 2015
Source:WorldEconomicForum
Source:WorldEconomicForum
Note: Ranking out of 144 countries
1YEAR OF
MODI GOVT

Health & primary education
Efficiency of goods market
Financial market
development
Technological readiness
Macroeconomic
environment
Where are
the signs of pick-up
• Consumption outlook is
improving
• Higher credit-rating
upgrades in consumption-
linked sectors
There’s promise in higher rating
upgrades
Ratings data show debt remains a
bone in the gullet: CRISIL Ratings’
analysis of data for the second half of
fiscal 2015 shows some improvement
in the credit ratio, or rating upgrades
to downgrades. Almost two-thirds of
the 816 upgrades seen in the second
half were driven by business-related
factors such as scaling-up of opera-
tions, and a modicum of improve-
ment in demand in consumption-
linked sectors. Export-linked sectors
and nondiscretionary consumer
segments such as agricultural prod-
ucts, textiles, packaged foods and
pharmaceuticals continued to see the
highest upgrade rates. But demand
isn’t anywhere close to the levels re-
quired to kick-start the corporate in-
vestment cycle.
Value of debt downgraded far more
than that upgraded: On the other
hand, there were 466 downgrades in
the second half of which almost 60
per cent were attributable to weak
liquidity.
Investment-linked sectors such as
capital goods, construction, engineer-
ing, steel and real estate continued to
log the highest downgrade rates.
However, a pervasive improvement
in credit quality remains elusive be-
cause the value of debt seeing down-
grades is far more than those seeing
upgrades. This is reflected in the ra-
tio of debt of upgraded firms to that
of downgraded firms, which stood
at 0.72 times. This proportion is even
weaker for large-sized firms at 0.45
times. Also, companies with high
debt continue to see more down-
grades than upgrades.
CRISIL believes heavy burden of
debt will continue to constrain the
MODIVERSARY

ability of large firms to improve their
credit profiles. A chunk of their debt
was taken for projects/ capacity ex-
pansions that haven’t been complet-
ed, or are facing demand slack after
completion. Essentially, a backwash
of irrational expansions undertaken
well before the Modi government
took the reins.
Business and consumer confidence
is looking better: Leading and
coincident indicators do show initial
signs of improvement in investment
outlook, especially in consumer-
facing sectors.
Confidence indicators are looking
up, too. The RBI’s quarterly survey
covering 1,565 manufacturing com-
panies, released in April 2015, shows
that industrial outlook has been on
a steady uptrend since June 2014.
And as per the latest survey, outlook
is improving for production, order
book, capacity utilisation, cost of raw
material, profit margins and employ-
ment, though it remains dismal for
exports and price-setting.
The indicators of private consump-
tion are also showing a steady up-
tick. One, the RBI’s consumer confi-
dence survey results show continued
improvement in future expectations
on employment and spending. More
than 80 per cent of the respondents
in the latest survey (March 2015) ex-
pect an increase in current as well
as future spending perceptions on
essential items, while 40 per cent
expect an increase in non-essential
spending. More than 50 per cent of
the respondents expect improve-
ment in employment situation one
year ahead. Second, inflation expec-
tations have eased, positively influ-
encing purchase decisions.
The RBI’s April 2015 survey results
show that inflationary expectations
are coming down. Third, retail-loan
growth has been rising fast in sectors
such as vehicle loans (22 per cent),
consumer durables (34 per cent) and
housing (18 per cent). Besides, au-
tomobiles (passenger vehicles and
scooters), organised retail and air-
lines are also seeing improved con-
sumer demand.
Improving credit ratios in consumption-led sectors
Business
expectations
survey
Consumer confidence improves Inflation expectations ease
Private consumption will provide
fillip: We believe private consump-
tion could be the bulwark
this year, but it will improve only
gradually. But this will depend a lot
on a normal monsoon. Over the last
few years, key contributors to the de-
cline in private consumption – high
fuel prices, inflation and interest
rates – have started to turn around
and will continue to do so in fiscal
2016.
Lending rates are edging down,
too, though by a mere 20 bps or so
till now. We believe the push to con-
sumption spending from easing of
lending rates this fiscal will be small
and gradual. Still, this will be posi-
tive for interest-rate sensitive sectors
such as automobiles, housing and
consumer durables.
Household spending power has in-
creased: CRISIL estimates household
spending power has increased by Rs
1.4 trillion in fiscal 2016 because of
low fuel prices, benign food infla-
tion and steadily improving income
growth. This money could be spent
on consumer discretionary items if
consumers feel the gains as lasting.
But if perceived as transient, it could
be deployed in
savings. However, with real returns
on savings expected to rise only mar-
ginally this year as nominal interest
rates ease and inflation falls, house-
holds could spend rather than save
the extra money. In nominal terms,
the Rs 1.4 trillion increase in the
spending power of households
is close to 2 per cent of their annual
spending.
Source:CRISILRatingsSource:RBI,CRISILResearchSource:RBI,CRISILResearchSource:RBI
Note: * Current situation compared to a year ago, ** Future expectations for a year ahead
Note: 3QMA=3 quarter moving average
1YEAR OF
MODI GOVT

What hasn’t worked so far
• Inability to pump-prime constrains manufacturing
• Investment cycle in limbo, agriculture remains stressed
• Consensus to pass key legislations elusive
The tyranny of inheritance
Inability to pump-prime, having in-
herited high fiscal deficit and infla-
tion: Typically, a slowing economy
is accelerated through deep interest-
rate cuts and increase in government
spending. But fiscal profligacy of the
past and inflationary concerns pre-
clude such steps. Public spending
is also restrained by the legislative
mandate to bring down India’s fiscal
deficit-to-GDP ratio. On its part, the
Reserve Bank of India (RBI) has cut
interest rates by 50 basis points so far
in 2015, to 7.5 per cent, but this has
not benefited the economy much be-
cause the banking sector’s bad-loan
mountain increases risk aversion,
restricts transmission of interest rate
cuts and subdues credit growth. Fis-
cal and monetary restraint entails
sacrificing growth in the short run,
but will eventually foster macro sta-
bility and improve India’s ability to
sustain higher growth rates in future.
Slack demand – and not policy –
holding back private investments,
especially in manufacturing: De-
spite some macros turning green, the
investment cycle in India is stuck and
demand for a number of consumer
goods remains subdued..
CRISIL Research analysed the per-
formance of 411 of the CNX 500 com-
panies (the rest belong to BFSI and
oil & gas sectors, which were exclud-
ed), accounting for 90 per cent of the
market capitalisation of the National
Stock Exchange, and compared their
revenue and operating profit growth
in the first nine months of fiscal 2015
to nominal GDP growth. It showed
69 per cent, or 285 companies, have
performed below par, while 126 com-
panies, or 31 per cent, outperformed.
While regulatory issues and high
leverage are constraining corporate
performance, our analysis shows
that it is demand slowdown that’s
hurting India Inc the most. This is
especially true of manufacturing
companies. A good 126 companies,
or 56 per cent of the 285 underper-
formers, are impacted by a demand
slowdown (also see Chart 8 on ca-
pacity utilisation). The No. 2 factor
was intensifying competition, which
impacted 45 – or 16 per cent -- of the
laggards. Policy was only the No.
3 factor, affecting 42 – or 15 per cent
-- of the companies, while high debt
or leverage was the No. 4 factor,
affecting 29 – or 10 per cent -- of
the companies. But from a banking
sector perspective, the contribution
of highly leveraged companies to
total outstanding debt is very high at
about 22 per cent.
Stagnant manufacturing, stress in
agriculture: The ‘Make in India’
programme will take a long while
to make a difference to India’s
manufacturing sector. But improving
growth in the sector is crucial
because one million Indians are
Poor demand curbs corporates, not so much policy
entering the workforce every month
and to boot, there is also labour
spillover from farms. The agriculture
sector, employing close to 50 per
cent of the workforce, continues to
battle low productivity and a raft of
other inefficiencies. Damage due to
unseasonal pre-summer rains on the
back of a sub-normal monsoon last
fiscal has aggravated farm distress
(see The criticality of monsoon for
hinterland).
Consensus to pass key legislations
elusive, risking dilution of reforms:
The government lacks majority
(having only 63 out of 244 seats) in
the Rajya Sabha, and the situation is
unlikely to change anytime soon.
The government will, therefore, need
do the hard yards, show statecraft
and build political consensus to
pass crucial Bills on land and GST
that will spawn structural reforms.
Consequently, there is a risk the
eventual legislations are watered
down. Deft political management
and effective communication will
be essential if the government has to
take forward the economy.
MODIVERSARY

What lies ahead
• Debt pile in infra, bad loans will curb speed of recovery
• Private consumption growth crucial to investment cycle
• Normal monsoon a critical need
Expect a slow recovery in fiscal 2016
If monsoon delivers, we expect a 50
bps uptick in GDP growth: We fore-
cast India’s GDP growth to touch 7.9
per cent in fiscal 2016, from an esti-
mated 7.4 per cent in 2015. The re-
covery, as we see it, will be triggered
by a lift in private consumption and
a mild pick-up in public sector-led
infrastructure projects.
The key risk to watch out for in the
immediate term is a sub-normal
monsoon. It can depress rural de-
mand and delay the consumption-
led recovery that we envisage.
The headroom in capacity utilisa-
tion needs to close first: We believe
that given the current macro-eco-
nomic pace, it could be 12-18 months
before headroom in capacity utilisa-
tion in the manufacturing sector gets
closed, and private investment cycle
is set in motion.
That’s because, despite underlying
optimism, companies are chary of
putting money where their mouth
is; they are seeking affirmations that
growth triggers are well-pulled and
will stay so.
The path growth could take
Closing in on a goldilocks spell: We
believe a gradual upturn has begun,
and indications are there should be
steady progress this time (Table 4).
And if inflation remains under leash
– as it seems now – at least a goldi-
locks spell can be had. But with lim-
ited counter-cyclical tools available
to pump the prime, unlike in 2009,
and covenants of fiscal consolidation
shackling government spending, the
speed of rebound will be limited.
Speed will also depend on how do-
mestic consumption shapes up. The
trifecta of lower food inflation, drop
in oil prices – which have left more
money in the hands of people in the
last 10 months -- and mild easing
of interest rates could stoke private
consumption that, in turn, will im-
prove sales in the automobiles, retail,
consumer durables and fast-moving
consumer goods sectors. But there is
unlikely to be a dramatic change in
the wealth effect such that demand
would overwhelm extant capacities
in the current fiscal.
On the infrastructure side, invest-
ments will start much earlier – in-
deed, in the current fiscal itself – fol-
lowing a government-led push to
spending in sectors such as roads,
railways, irrigation and urban infra-
structure. But for private corporate
investment in infrastructure to start,
resolution of policy bottlenecks,
more equitable sharing of risks and
rewards with private sector (for PPP
projects) and improved demand visi-
bility are critical. That will take time,
and could turn favourable only after
the current fiscal. Highly leveraged
corporates, especially in the infra-
structure space, would also be averse
to taking risks and therefore, the
government will have to bear more
risks, till private sector cash flows
and confidence levels improve.
Exports offer no ballast: The global
economy is expected to navigate a
mild and uneven recovery path in
2015. Muted world trade growth will
restrict exports. The World Trade
Organisation expects world trade
to grow at 3.3 per cent in 2015 and
2016 compared with over 5 per cent
recorded since 1990. Also, an appre-
ciation in the rupee in real terms has
hurt India’s competitiveness.
Investment revival is the biggest
challenge
We do expect a minor uptick in in-
vestments in select sectors, especially
infrastructure, where government
role is dominant. But in manufactur-
ing, which is dominated by the pri-
vate sector, revival will depend on
the speed at which private consump-
tion demand improves. Also, some
push to investments this year will
come from unclogging of projects.
Investment revival is inarguably
the single-biggest challenge for the
Modi government. Over the last few
years, investments have trailed GDP
growth and the overall investment
rate has slipped to 29.8 per cent in
It will take 12-18 months for private investment cycle to revive
: *Measurement from beginning of fiscal 2016
Source:CRISILResearch
1YEAR OF
MODI GOVT

fiscal 2015 from 33.6 per cent in fiscal
2012. The reasons are well known. In
the manufacturing sector, swathes of
under-utilisation (Chart 8) and poor
visibility on demand have slowed
the pace of investments. In the infra-
structure sector, high leverage and
interest costs (the sector’s interest
cost to operating income ratio rose to
11.5 per cent in fiscal 2014 from 4.6
per cent in fiscal 2010), falling returns
on investment due to delays in proj-
ect implementation, and lack of vis-
ible demand pick-up are deteriorat-
ing private-sector investment.
Good thing is, ease of doing busi-
ness is improving: Since taking over,
the Modi government’s emphasis
has been on reviving the investment
climate by improving the ease of do-
ing business. A number of steps have
been taken in this regard.
However, the nature of these mea-
sures is such that immediate gains
would be less than what will accrue
in the medium-to-long term. Such
steps include launch of online por-
tals and monitoring of timelines for
providing project clearances and
providing licences, consolidation of
ministries to ensure faster decision-
making and taking the ordinance
route to push through the Bills. Re-
sults are most visible in the roads
sector where debottlenecking has
significantly improved the pace of
paving.
Public spending in infrastructure re-
ceived a significant boost in the Bud-
get announcements for fiscal 2016
with spending allocation for roads,
railways, irrigation and urban infra-
structure increasing nearly 1.5 times.
However, overall capex spending
has not gone up much and hence,
only a few sectors are set to benefit
from higher government spending.
But the private sector will go full
tilt on investments only once the de-
mand picks up and other factors con-
straining it are addressed, so remov-
ing them in double-quick time is an
imperative.
Growth in investment-linked sectors
has lagged consumption-driven sec-
tors in the past few years. And we
believe this gap will widen further in
fiscal 2016.
Source:CSO,RBI,CRISILResearch
Note: F=CRISIL forecast
Better-looking colours of the macro-economy
The capacity utilisation picture
Revenue growth to be higher for consumption-linked sectors
Note: Utilisation rate for automobiles is the average for passenger cars, two-wheelers, commercial vehicles and tractors
Note: F=CRISIL forecast
The criticality of monsoon for
hinterland
Our views are predicated on a par
monsoon: The IMD has predicted a
7 per cent rainfall deficiency (south-
west monsoon) in 2015, and going by
international weather forecasters, El
Nino conditions – which typically
distorts spatial distribution of mon-
soon – have emerged. An important
assumption in our growth estimates
is that rainfall will be normal or near-
normal this fiscal.
Deficient monsoon will cull 50 bps
from GDP growth: According to our
calculations, a deficient monsoon
will take away 50 basis points from
our GDP forecast of 7.9 per cent for
fiscal 2016.
This is the worst-case scenario. But,
we go by the assumption that al-
though some monsoon deficiency is
predicted in 2015, spatial distribution
of rainfall could still be normal, lead-
ing to a normal agriculture year, as
past experience shows. For instance,
in the last 15 years, there were two
years when rainfall deficiency was
7-10 per cent - similar to the Indian
Meteorological Department’s (IMD)
MODIVERSARY

forecast for 2015 - but in these years
agriculture production did not suffer
because rainfall was timely and well
distributed. Also, the latest forecast
is the IMD’s first forecast and more
reliable ones will only be available in
June.
Angst in rural India: Last fiscal,
monsoon deficiency was 12 per cent,
with some regions facing acute short-
age of rains. In March and April 2015,
unseasonal, pre-summer rains dam-
aged crops in regions already reeling
from inadequate monsoon. A second
straight year of weak monsoon will
decrease the efficacy of India’s irri-
gation ecosystem and hit agriculture
output and farmers severely. Al-
ready, rural wage growth has plum-
meted to around 8 per cent in latest
count, from a peak of 18-20 per cent
in 2012. Therefore, a weak monsoon
will also completely wipe off gains
in other sectors of the economy. For
details, see our report titled, ‘Clouds
over rain’ released in April. Mitigato-
ry and pre-emptive steps by the gov-
ernment are therefore an imperative.
Focus areas for government: Given
the current situation of agriculture
and its importance in both employ-
ment and growth, the government
needs to go on mission-mode to find
solutions, such as to reduce systemic
dependence on rainfall by exponen-
tially increasing the drip irrigation
ecosystem, improving skillsets at the
farm-gate through many more tar-
geted initiatives, bringing sea-change
in the farm-to-fork trans action chain
Monsoon and agriculture GDP
Note: Years when monsoon deficiency was 7 to 10 per cent, *first forecast issued in May
Source:IMD,CSO
and rapidly ramping up warehous-
ing and cold storage infrastructure
with win-win revenue models.
Banking hobbled, bad-loan
millstone hangs heavy
Exposure of banks to vulnerable
sectors remains high: While credit
growth should pick up from the lows
of fiscal 2015, continued deterioration
in the asset quality of banks and the
resultant risk aversion will remain a
headwind in fiscal 2016. Gross non-
performing assets (GNPAs) of banks
shot up from 3.9 per cent as of March
31, 2014, to 4.3 per cent by the end of
the previous fiscal.
Growth in slippages are expected to
decelerate in the current fiscal, but
reported GNPAs will still remain
at elevated levels as some of the as-
sets restructured in the previous 2-3
years, especially in the infrastruc-
ture, construction, and textiles sec-
tors, degenerate into NPAs again.
We forecast GNPAs to edge up 20
basis points to around 4.5 per cent of
advances -- or rise by Rs 600 billion
to Rs 4 trillion -- by March 31, 2016
(Chart 10). Indeed, overall weak as-
sets of the banking sector could cross
Rs 5 trillion. Worryingly, exposure of
banks to vulnerable sectors is expect-
ed to remain high (65 per cent to the
medium- and high-risk sectors), just
the way it was in fiscal 2015.
Bad loans are seen rising mainly be-
cause of the withdrawal of regulato-
ry forbearance on restructuring, and
high slippages from restructured as-
sets. As much as 40 per cent of assets
restructured between fiscals 2012
and 2014 have degenerated and be-
come NPAs again.
CRISIL believes the government’s
stance to provide capital only to PSBs
meeting its performance thresholds
– even as they reel under asset qual-
ity and profitability pressures – will
force many to grow at a significantly
slower pace and spawn capital stress
for many weak banks.
Dirty picture
Note: F = forecast. According to CRISIL’s definition, weak assets include gross NPAs + 30% of restructured
assets (excluding those of state power utilities) + 75% of security receipts
Source:CRISILRatings
1YEAR OF
MODI GOVT

Leverage pain will continue in
infrastructure: Debt piling up in the
books of infrastructure companies
is a major roadblock to reviving
investments. In infrastructure,
especially for companies engaged in
road and power-generation projects,
accumulated debt is so high their
interest cost threatens to go off the
charts. Their ratio of interest cost to
operating income galloped to 11.5
per cent in fiscal 2014 from 4.6 per
cent in fiscal 2010.
In the past, many private developers
have bid aggressively for projects,
especially in roads and power.
However, most projects have seen
execution delays due to issues such
as fuel
availability, land acquisition and
environmental clearances; resulting
in significant cost overruns. Also,
volume growth for operational
The debt-wish saga
projects has been below expectations
on account of slowdown in economic
activity. As a result, poor operational
cash flows coupled with rising
debt burden have led to a sharp
deterioration in the debt-servicing
ability of many companies. Banks,
too, are wary of lending to the
sector. Many private infrastructure
companies have either sold or
are in the process of selling their
operational assets on lender pressure
to pare debt even as they need to find
funds to bid for new projects. Many
others have resorted to restructuring
of debt and assets. We believe it will
take time for companies to clean up
their balance sheets and a significant
pickup in private infrastructure
investments looks at least a couple of
years away.
Till then, the public-sector has to
carry the can.
Courtesy: CRISIL
Real Estate Report Card
9 Impressions Indian Real Estate Stakeholders Have about Modi
Government - And JLL’s Take
JLL India’s Research team is releasing a whitepaper on the first year of
Modi government. A survey of the Indian real estate community, done
as part of the research, reveals nine impressions, or misimpressions, of
this government that exists in the minds of Indian realty’s stakeholders.
The report also provides research team’s own views on each of these:
Read on.
ANUJ PURI,
Chairman and Country Head at JLL India
CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services.
MODIVERSARY

1YEAR OF
MODI GOV
1. Much has been said, but little has been delivered
JLL’s view: Modi has taken several initiatives, the
outcomes of which will be seen only in the medium-to-
long term (i.e. 2-3 years). Initiatives such as developing
affordable residential projects, robust infrastructure,
financial inclusion of the LIG segment into the banking
sector, etc., are important initiatives but require time to
fructify. Critical evaluation of success at this stage may
be premature.
2. Power is too concentrated
JLL’s view: This fear loomed large in the minds of
several political and market analysts since the time
Modi came to power. The highly centralised appearance
of the government has moderated in recent times with
decentralisation of power to cabinet members and states’
chief ministers. We agree that power should be further
de-centralized to the grassroots level (i.e. district and
panchayat level authorities) and this further downward
percolation of power may take another year or two.
3. Land Acquisition and Rehabilitation and Re-
settlement Bill not progressing as expected
JLL’s view: There has not been much progress on the
bill since the time it was first approved by the previous
Congress government, and even after the recent
amendments made in the Bill by the Modi government.
Modi’s grand vision to build superior infrastructure,
affordable housing projects and smart cities is related
to the success of this Bill, which could be cleared by
the Parliament after recommendations by the Joint
Committee of Parliament come through in the monsoon
session.
4. Clarity needed on ‘Housing for all by 2022’
scheme
JLL’s view: After having announced the scheme during
the first Budget in June 2014, the government has
remained silent on details. The market expected fine
prints to come by in subsequent communications. The
task of constructing 2.34 million homes every year as
against an actual delivery of 1.2 million homes during
the 11th five-year plan period (ending March 2012) is
humungous. As of now, matters definitely do not look
upbeat on this front, and the doubts being expressed are
justified.
1YEAR OF
MODI GOVT

5. Smart Cities Mission cleared by the Cabinet
but clarity needed
JLL’s view: As the definition of smart cities given in
the note released by Ministry of Urban Development
is too broad, different agencies have had different
interpretation of the concept. Even though the union
cabinet has cleared the Smart Cities Mission and
allocated Rs 48,000 crore, there is a lack of clarity on
identification criteria for the qualifying cities.
6. The Real Estate (Regulation and Development)
Bill still pending
JLL’s view: Construction delays in many real estate
projects are the result of delay in granting statutory ap-
provals. Cost of financing material costs rise exponen-
tially as a result of such delays, and this has an adverse
impact on housing prices. The Bill – that the government
is currently considering sending to a select committee
for review – does not cover the actions of approval au-
thorities and largely attempts to curb malpractices at
the developers’ end. We feel that the Modi government
could have done more on this front.
7. E-commerce needs to be regulated
JLL’s view: E-commerce has taken the Indian retail
market by storm, and has been growing at close to 35
per cent y-o-y in the last few years. Stiff competition
among e-commerce players has resulted in price wars
that had impacted the margins of physical retailers.
There is a need to regulate the online retail space and
bring them on level playing field along with physical
retailers. As of now, we see no evidence of efforts being
made in this direction.
8. Anti-corruption needs to be a focus area
JLL’s view: The promise of bringing the Lokpal bill
immediately had given Modi a marginal edge over
the AAP party - the champions of the anti-corruption
brigade - during the elections of May 2014. However,
subsequent lack of progress or even convincing talk in
that direction has been giving an impression that the
issue is a low priority one for the Modi government. If
not for this apathy, Modi would have performed better
in the recently concluded Delhi elections.
9. Tax structures are complex and retrospective
tax amendments continue to haunt businesses
JLL’s view: While the Modi government had expressed
its strong intention of doing away with retrospective
amendments, the issue still remains unresolved. Also,
while simplification of tax structures has been spoken
about, this will take some time to implement. If these tax
issues are addressed properly, India would move for-
ward in terms of improvement in World Bank’s ‘Doing
Business’ rankings.
Major Events of Modi as PM of India (1 yr)
26th May 2014: Modi Government to Rule – Prime Minister
Narendra Modi and his cabinet moved to Rashtrapati Bhawan
after winning in the landslide elections.
27th May 2014: First meeting with Pakistan Premier Nawaz
Sharif in the office. Just next day after getting the throne.
14th June 2014: Charge on Military Might, Prime Minister Modi
dedicated INS Vikramaditya a warship and want to make the
country self-reliant on production defence gear.
21st June 2014: First face against the decision, Modi government
tasted the protests on the issue of rail fare hike and increase
the import duty on sugar. It was the first bitter experience to
government by opposition parties and the public.
27th July 2014: Discrimination against minorities created a
doubt whether the Modi government is seriously interested in
preserving equality. Shiv Sena lawmaker forced food into the
mouth of a Muslim caterer, another indicating that India could
become a Hindu nation under Modi.
15th August 2014: Making his first Independence Day speech
after becoming India’s Prime Minister. Modi made his speech
with two main points ‘Swacch Bharat’ and exhorted countrymen
to produce attempts to train the girl child.
5th September 2014: The Teachers’ Day dilemma-Many were
enraged especially on social media as to how students were
made to come to school on a day generally regarded as a
holiday.
25th September 2014: Shiv Sena breakup-The ruling BJP and
the Modi government were hit by a huge blow after hectic
negotiations with the Shiv Sena.
19th October 2014: Maharashtra’s crucial election results
positive for Modi. Haryana also, for the very first time, gave
the initial chance at power to the BJP. Modi had campaigned
vigorously to woo voters.
12th November 2014: PM Modi’s foreign outreach continued
along with his presence in the ASEAN-India as well as the East
Asia Summits held in Myanmar at NayPyiDaw.
1st December 2014: In a major embarrassment for the Modi
government communal comments by Sadhvi Niranjan Jyoti
caused an uproar in the winter session in both houses of
Parliament.
23rd December 2014: J&K History was created by the BJP in
Kashmir and Jammu by crossing the Jammu area and becoming
the second-biggest party in the state Assembly elections.
The verdict in both states was a testament to 2014 staying
a tremendously successful electoral year for its own leader
Narendra Modi and the ruling BJP.
7th January 2015: Four children – Sadhvi Niranjan Jyoti
statement every Hindu woman must produce at least 4 children
to protect the religion. Once again, the remark was widely
panned and the PM’s silence over it questioned.
10th February 2015: Delhi Debacle – Modi’s techno-minister
Suresh Prabhu, the Railways Minister, presented his first
budget announcing no increase in passenger fares.
22nd March 2015: Modi government battled extreme heat
over the controversial land acquisition bill, PM Modi spoke to
thousands of farmers over the radio, trying to dispel rumours
that his policies are anti-farmer.
14th April 2015: External Affairs Minister Sushma Swaraj
declared on Twitter the Indian embassy in Yemen had been
evacuated in light of the war there. 17th April 2015: PM Modi
undertook a three-state tour to France, Germany and Canada
exhorting industrialists and CEOs to contribute to the ‘Make in
India’ programme of the government.
May 7, 2015: Historic property swap – Foreign Minister
Sushma Swaraj got a round of applause from all quarters in the
Parliament as members across opposition and treasury benches
came together to pass a constitution amendment bill for a
historic land boundary deal with Bangladesh.
MODIVERSARY

INSURANCE
My name is Insurance and
I am not an Investment
W
ith due apologies to Mr. Karan Johar,
inspiration for the above wtitle comes
from his movie tagline ‘My Name is
Khan and I am not a terrorist’.
My name is Insurance...
... and I am not an Investment
Or, rather it would be apt to admit
... and I am not a “good” Investment
Why?
Firstly, your primary expectation from any investment is
to earn GOOD returns. And I definitely fail on this front.
When you give me your premium, out of Rs.100 about
- Rs.2-4 goes towards providing you the insurance cover
i.e. mortality charges,
- Rs.10-15 is paid out as the agents’ commission, and
- Rs.3-5 is spent on fund management and policy admin-
istration.
Thus, you lose Rs.15-25 as soon as you pay me the pre-
mium and only Rs.75-85 remains as investable amount.
Instead, with bank fixed deposits, bonds, debentures,
debt mutual funds, PPF, EPF, NSC, etc. your investment
amount remains at Rs.100 or thereabout, as most of these
carry “zero or minimal” charges.
Since the money is finally invested in the same debt mar-
ket in India, it will earn more or less the same returns.
However, as your ‘net invested amount’, after deducting
all costs, is lower in insurance, it is but natural that on
SANJAY MATAI
Author-Advisor, Personal Finance, The Wealth Architects

maturity you will receive a lesser payout as compared to
any other aforesaid product. In other words, while your
effective returns from insurance would typically be in
the range of 5-7 per cent p.a., other investments would
deliver around 7-9 per cent returns.
I am sure you don’t prefer earning such poor returns.
Secondly, I offer very poor prospects of liquidity vis-a-
vis others.
I believe in long-term relationship, generally extending
to around 10-20 years. Moreover, it is a one-sided affair.
During this long tenure, you cannot depend on me to
help you even if you are in dire and urgent need of mon-
ey. If you surrender your policy, I will give you not even
half of your accumulated corpus (unless the relationship
is nearing maturity).
Other investments are lot more understanding and ac-
commodating. With them, you will be able to ‘prema-
turely’ access your money with minimal damage.
Thirdly, I am an extremely rigid fellow.
If you fail to pay even a single premium over the 10-20
years of policy tenure, I will cancel your policy. I demand
complete and absolute commitment.
With other investments, you have the flexibility to
change your amount every year based on your financial
circumstances. If you are going through difficult times,
you could always cut down on your investment. Alter-
natively, when you are making good money, you can
increase your outlay.
Of course, I enjoy lot of trust because I am considered
“risk-free” and “tax-free”. But, frankly speaking, this
edge over others is neither unique nor useful.
If you have a tunnel vision and believe that an invest-
ment is risk-free only when you are assured of receiving
your money back, then I am risk-free. But default-risk is
not the only risk in life. Given the poor returns, I offer no
protection against the inflation-risk. Plus, without going
into the nitty-gritty, debt mutual funds offer excellent
opportunity to benefit from the interest rate movements,
whereas with me you will also suffer from the interest-
rate risk.
Yes, the returns that I offer are tax-free, while most of
the other investments attract tax. However, PPF and EPF
are tax-free. Moreover, even with the ‘taxable’ debt mu-
tual funds this advantage is lost. With indexation benefit
over 3-5 years, your returns from debt funds too would
become practically tax-free.
Thus, I the Insurance, hereby declare that I am not a
‘Good Investment’.
(Note: For simplicity, I have focussed on the currently
more popular traditional insurance plans such as mon-
ey-back or endowment. I haven’t discussed the ULIPs,
where you have the option to invest in equity too. They
do not suffer from the aforesaid deficiencies as seriously
as the traditional plans. However, they still don’t just
match up to their closest rival and competitor, the equity
mutual funds.)
Exclusions In Health Insurance Often Cause
Conflicts
Not all treatments are payable by insurance companies
under a health insurance policy. Not all people are
fully aware of these exceptions, which in insurance
parlance are called “exclusions”. This lack of awareness
and communication routinely results in disputes and
disagreements with the insurance company. Listed
below are the most common exclusions you will often
find as part of any typical health insurance plan.
1. Amount spent on treatment of pre-existing diseases
/ conditions / ailments / injuries, including any
complications arising from them, will not be payable.
It does not matter whether you were aware of such
problems or not. Such medical issues normally get
covered only after 48 months (i.e. 4 years) of continuous
coverage under the health insurance policy.
2. Any illness or disease, that is contracted during the
first 30 days from the date the insurance policy becomes
effective, is excluded. However, medical expenses that
arise out of an accident would be covered during these
first 30 days.
3. There is a waiting period — typically around 12 to 24
months — during which certain specified diseases will
not be covered. Some such common exclusions include
cataract, piles, hernia, tonsils, hypertension, diabetes,
benign ENT disorders, etc.
4. There is a waiting period — typically around 48 months
— during which certain age-related medical problems
will not be covered. Some such common exclusions
include osteoporosis, knee replacement, arthritis, etc.
5. Corrective or cosmetic dental surgery, filling of cavity, root
canal treatment, etc. are all excluded from a typical health
insurance plan. However, dental problems that become
necessary due to any accident, are payable under the policy.
6. Surgery for correction of eye sight, cost of spectacles
and contact lenses, hearing aids.
7. Treatments related to pregnancy, childbirth,
miscarriage, abortion and caesarean section.
8. Diagnostic charges e.g. laboratory examinations, x-ray
etc. which are not related to any specific illness, injury
etc. that require hospitalization.
9. Psychiatric and psychosomatic disorders.
10. Alternative therapies such as naturopathy,
acupressure, acupuncture, etc.
11. Genetic disorders, stem cell implantation / surgery.
12. Treatment of obesity, weight control program,
Cosmetic and Plastic surgery e.g. botox, liposuction.
13. Circumcision, Infertility, Sterility, Venereal diseases,
sexually transmitted diseases, including HIV AIDS.
14. Vitamins, tonics, vaccination and inoculation.
15. Any injury or disease that is a result of any war,
invasion, nuclear weapons/materials or problems arising
out of misuse of liquor, drugs etc.
Medical problems are anyway a difficult and challenging
experience physically, mentally and emotionally. There
is no point in adding disappointment and bitterness
to it. Besides, you can plan the cost of treatments more
judiciously and minimize the financial setbacks. So
read the terms and conditions of your health insurance
policy... now.

The rule, “Prevention is better than cure” is equally applicable in the case of credit
portfolios of banks, as it is for the maintenance of our own health.
Managing Stressed Assets
D
uring the 20-month
period since he be-
came RBI Governor,
Dr Raghuram Ra-
jan has successfully
taught (his teaching abilities were
recently appreciated by none other
than Prime Minister Narendra Modi,
who had personally experienced it)
the government and banks the need
to arrest the growth of stressed assets
and to handle with care the huge ac-
cumulation of Non-Performing As-
sets (NPAs) with Indian banks. The
awareness created by him has started
yielding results, if not in numbers, at
least in a change in approach of gov-
ernments and bank managements to
the management of NPAs.
The concern about stressed assets
has become an integral part of the
speeches and responses during
meetings/interviews given by CEOs
of banks, including those on the
occasion of announcing quarterly
working results. No wonder, in the
interview given to The Global ANA-
LYST, Santanu Mukherjee, Managing
Director, State Bank of Hyderabad
(TGA, May 2015), mentioned that
NPA management was the most im-
portant domain for the top manage-
ment and the bank had a specialised
Stressed Assets Management Group
to deal with the NPA challenge on a
daily basis. In December 2013, in a
Discussion Paper on “Early Recog-
nition of Financial Distress, Prompt
Steps for Resolution and Fair Re-
covery for Lenders: Framework for
Revitalising Distressed Assets in the
Economy” brought out by Reserve
Bank of India, the regulator had this
to say:
“With the slowdown of the Indian
economy, a number of companies/
projects are under stress. As a result,
the Indian banking system has seen
increase in NPAs and restructured
accounts during the recent years. Not
only do financially distressed assets
produce less than economically
possible, they also deteriorate
quickly in value. Therefore, there is
a need to ensure that the banking
system recognises financial distress
early, takes prompt steps to resolve
it, and ensures fair recovery for
lenders and investors”.
Needed ‘out-of-the-box’
measures
Suffice to say, there is greater
awareness now, on the part of RBI
and the lending banks about the
need to arrest further accumulation
of stressed assets and ‘managing’
the NPA that has already entered
the banks’ books. The proposals
considered by RBI to manage NPA
menace included:
• Making future borrowing more
expensive for borrowers who
do not co-operate with lenders
in resolution of NPAs on agreed
terms.
• More liberal regulatory treatment
of asset sales, where recovery of
dues can be made only through
that route.
• Takeout financing/refinancing
possible over a longer period
and will not be construed as re-
structuring.
BANKING SECTOR
M G WARRIER, Ex-GM, Reserve Bank of India

• Steps to enable better functioning
of Asset Reconstruction
Companies.
Let us go back in history and look
at the genesis of the concept of
NPAs and handling of defaults
in repayments in general. It was
never the lack of awareness about
the need to recover loans on due
dates to ensure recycling of funds
or the institutional neglect towards
recovery of loans that has brought
India to the shameful position of
having financial institutions with
unmanageably high stressed assets.
In the introductory paragraph on
‘The Overdues Syndrome’, the
Report of the Agricultural Credit
Review Committee (ACRC- Khusro
Committee, 1989) had this to say:
“Repayment of the loan together
with interest thereon by the borrow-
ers is central to the smooth func-
tioning of institutional credit. The
assumption while providing credit,
is that its application to production
generates enough produce which in
money terms which in money terms
would be sufficient to repay the loans
together with interest and leave a
reasonable surplus. Credit can be
said to be effective only if this basic
postulate is borne out. However, this
in itself is not sufficient; the genera-
tion of incremental income has also
to be accompanied by willingness of
the user to repay.
A default in repayment can, there-
fore, occur if either the assumption
regarding production does not turn
out to be valid or even when the va-
lidity of the first assumption is not
in question, the second assumption
is proved wrong. Efficient manage-
ment of recovery of dues is, there-
fore, not only of crucial importance
but also amongst the most complex
of all problems associated with insti-
tutional credit.”
Quoted this to emphasise that credit
appraisal, close monitoring of not
only the projects/activities financed,
but the willingness of the borrower to
make timely repayment and efficient
management of recovery were all
concerns of the policy makers in
India even before the emergence of
NON PERFORMING ASSETS
TGA
financial sector reforms, circa 1991.
The Committee on the Financial
System (Narasimham Committee)
which submitted its report in No-
vember 1991, made several recom-
mendations for toning up the op-
erational efficiency of the banking
system, including:
a. The balance sheets of banks
should be transparent and full
disclosure made, as recommend-
ed by the International Account-
ing Standard Committee, in a
phased manner.
b. Banks and financial institutions
should adopt uniform account-
ing practices, particularly with
regard to income recognition
and debt provisioning and these
should correspond to interna-
tional standards.
Following the Committee’s recom-
mendations, RBI issued necessary
instructions/guidelines to the banks.
If these guidelines were followed
in letter and spirit, if public sector
banks and private sector banks had
been given a level playing field, if
the expectations from the banking
sector was uniform without owner-
ship-divide, if there was no interfer-
ence from a government anxious to
enforce popular schemes for imple-
mentation by public sector banks ir-
respective of the economic feasibility
or financial viability of individual
projects/activities, RBI Governor Ra-
jan would not have to come down
heavily on banks within months of
his occupying the august office and
say that ‘the worst way for a bank
management with limited tenure to
deal with distress was to “extend and
pretend” to evergreen the loan, hop-
ing that it recovered by a miracle or
that one’s successor had to deal with
it’. He further advised:
“Here again, you bankers have a
critical role to play, by fighting the
natural incentives that are built into
the system. You have to help those
with genuine difficulty while being
firm with those who are trying
to milk the system. The RBI will
help you with every means at our
disposal.”
The writing on the wall!
My own reading is that the message
has gone down the line well and
slowly, the bank managements and
GOI are falling in line. During the
three-year period, 2011-14, the Gross
Non-Performing Assets (GNPAs)
of public sector banks grew at an
alarming pace. In many cases, as a
percentage of outstanding credit, it
doubled. By additional provisioning,
private sector banks and some public
sector banks showed Net NPAs at
levels below one and two percentage
of outstanding credit, respectively,
for FY’14. If this is the position when
private banks work with high Net
Interest Margins (NIM), it will really
be an uphill task to arrest further
accumulation of stressed assets and
ensure recovery of a reasonable
percentage of current NPAs. The
apprehension is based on the fact
that the pressure on NIM is going
to be much more real in the coming
years as the Indian economy gets
integrated to global economy and
the present level of NIMs, some of
which are above the lending rates
in some countries, will become
unsustainable. Given, the message is
loud and clear: perform or peril.

Ivo Pezzuto - THE GLOBAL ANALYST JUNE 2015

Ivo Pezzuto - THE GLOBAL ANALYST JUNE 2015

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