Siddhartha Ahluwalia 0:00

Hi, this is Siddhartha Ahluwalia. Welcome to The Neon Show. I’m your host and also founder of Neon Fund, a B2B SaaS fund that invests in the seed stage in the most enterprising software companies coming out of India for the globe.

Today I have with me Rajrishi Singhal. Welcome to the podcast, sir.

Rajrishi Singhal 0:18

Thank you for that.

Siddhartha Ahluwalia 0:19

Your book Slip, Stitch and Stumble is a fantastic book. I read through it to prepare for the podcast today. Really enjoyed it and made me go back into some of the previous podcasts that I have recorded with C. Rangarajan sir, ex-RBI governor, right, on the times of 1991-1992 when the economy got opened.

And you told, tell about, you know, the India’s financial reforms.

Rajrishi Singhal 0:39

Right.

Siddhartha Ahluwalia 0:39

That was the starting point and now today we have seen so many reforms, the Indian economy is booming. But I want to go back to a basic question before we delve into, you know, the past. Right.

How have you seen in your career, the corruption reduce or increase over a period of time? Rajiv Gandhi, our ex-prime minister said that, himself a prime minister telling that if centre allots rupees 100 for the poor, only rupees 15 reaches them, 85% loss.

Rajrishi Singhal 1:11

Yeah, yeah, yeah. No, I mean, I think corruption hasn’t gone away. I think, and I’m not talking about just the financial sector here, you know, I’m talking of the broader economy, broader system at large and the corruption.

I mean, if you look at, say, the three levels of governance, which is your centre, state and then local governance, right, at all three stages, there is corruption. Even in law enforcement, there is corruption. So corruption has become an endemic, integral part of our society.

And it is becoming now institutionalized. It was institutionalized, but increasingly so, you know, the institutional character of corruption has been embedded, I mean, it is getting reinforced with every passing day. And I think the problem of corruption starts with the way we finance our election campaigns.

I think the root cause for corruption in our society, in our lives is primarily the way parties finance their election campaigns. So campaign finance infirmities or distortions, unless they are resolved, and I don’t think the electoral bonds are, you know, the ideal instruments for sorting that out. I mean, it was one step, but it was, I think, a wrong step in many ways.

And no solution is going to be perfect or ideal. But I think we should look for some solutions, which makes funding of elections transparent. Having said that, I do feel, however, that maybe in our lives, your life, my life, the incidence of corruption, the technology makes sure in some ways that, you know, our interactions with government officialdom and the friction points that arise and that give rise to, you know, cause for corruption, that has come down slightly for, you know, I’ll call it the G2C interaction, government to consumer, but government to business or B2B, you know, that corruption is still there. I mean, we had this conversation among all our friends yesterday, all senior executives, chief executives, and from their experience, they were saying that cost of doing business.

So if you are in certain states, corruption is at least 25% of your cost, total cost, and you now have to live with it. And so, but if it’s 25%, I’m sure the business is not going to, you know, kind of not pass it on. So at the end of the day, consumer actually bears a higher price for corruption, because you’re paying much higher prices for apartments, for cars, for what have you, because the end consumers has to then bear the cost of this corruption.

And I think that’s an inefficient way to run the economy. Because if you take out 25%, then you know, in many products, inflation rate will come down drastically. If you look at say, medical education, or you look at healthcare costs, or education costs, that will come down drastically, and make it much more accessible.

And so I think corruption isn’t going away anytime soon from our lives.

Siddhartha Ahluwalia 5:17

In spite of efforts like demonetization, GST, and all these.

Rajrishi Singhal 5:22

So I think it’s a misconception to think that demonetization was meant to root out corruption. If they thought that it’s going to root out corruption, then I am sorry to say that their understanding of economy is quite warped actually, because that’s not how the economy works. If there is a person who’s corrupt, then his or her resources earned through corrupt means is not kept in cash, right?

It will be deployed somewhere. Because you don’t keep cash, I mean, when cash depreciates in value. So the idea that you know, all the corruption is accumulated in cash somewhere is a silly idea, is a very naive idea.

So demonetization was I don’t think the, although the rhetoric was that they wanted to root out corruption through demonetization, but I think the end objective was completely different.

Siddhartha Ahluwalia 6:33

And how have you seen, right? Now coming back to the economic reforms of India, like how have you seen those in the last 42 years, since the economy opened up in 1991, 1992? Right.

Rajrishi Singhal 6:49

So, you know, the reforms process had begun in the 80s. I think it began with the Rajiv Gandhi government. When he became Prime Minister, he was an accidental Prime Minister in many ways, right?

Siddhartha Ahluwalia 7:05

So was Manmohan Singh.

Rajrishi Singhal 7:06

But that was somebody else’s. Yeah. But Rajiv Gandhi in the true sense of the term was an accidental Prime Minister.

He wouldn’t have been Prime Minister had his mother not been assassinated. And when he became Prime Minister, he was a pilot, he was interested in technology, he was young, and he was despairing of the bureaucracy and the control regime. And, you know, he had traveled abroad, and he had seen, you know, how lesser controls, freeze up people, he’s a entrepreneurial energy.

And he wanted to do all of that. And, but I somehow feel that his initial burst of enthusiasm was thereafter curbed somewhat. Again, I think, by the seniors in the system, senior in the system who had a lot to lose if status quo changed, as well as bureaucracy, because bureaucracy was also used to controls, right?

I mean, the whole bureaucracy was predicated, the structure, the framework was predicated on the idea that controls is the way to govern.

Siddhartha Ahluwalia 8:18

That is what we borrowed from the British.

Rajrishi Singhal 8:20

Exactly. So it became part of their DNA, right? They didn’t have an alternative model in mind.

Siddhartha Ahluwalia 8:27

We still call DM the collector, because he was collecting taxes during.

Rajrishi Singhal 8:31

Exactly. Yeah, exactly. So, I think, and when he did those, you know, initial forms, so he did something called broadbanding, like, so industrial licensing was enforced, then now, if you were manufacturing trucks, for instance, you needed a separate license to manufacture motor cars.

So he said, yeah, you know, it’s the same thing almost, it’s just, you know, it’s four wheels and moves, right? But it’s a different looking beast. Why do you need a separate license?

Siddhartha Ahluwalia 9:09

And then somebody can object, then SUV is not a car also, you need a separate license for SUV.

Rajrishi Singhal 9:15

But he allowed for broadbanding in certain industries. And that, because he allowed this, you know, broadbanding of licensing, it opened up a lot of energies in the system. A lot of people were able to take advantage of that and it freed up.

So it added to GDP growth, for instance. So little things like that, then I think, you know, one of the big things that happened, then, which, you know, is not appreciated today as much is he brought in Sam Pitroda, who then revolutionized telecom in India. Till then, you know, we had very few telephone instruments in the country, right?

I mean, I don’t remember the data now, but one telephone instrument per 10,000 or, you know, something of that sort.

Siddhartha Ahluwalia 10:05

Almost like today in healthcare, one doctor per 10,000 people.

Rajrishi Singhal 10:09

Yeah. And the reason for that was because our exchange systems were outdated, you know, telephone exchanges, and those switchboards, etc, were expensive, monopolized. So Sam Pitroda came and changed that and what he did was he enabled one PCO per village.

That was another revolution that actually changed India. But the core didn’t change.

Siddhartha Ahluwalia 10:39

What do you mean by core?

Rajrishi Singhal 10:40

Core was that, you know, so the government was the Maibab Sarkar. And government continued to be the Maibab Sarkar. Let’s say, I mean, you know.

Siddhartha Ahluwalia 10:53

This is not a true democracy, right? If the government is the Maibab Sarkar?

Rajrishi Singhal 10:57

Yeah, I mean, there is a question about what is true democracy and whether it exists anywhere in the world at all. But let’s use a financial sector example, since we’re discussing Slip, Stitch and Stumble. So if you were a, say, you know, automobile manufacturer, hypothetically speaking, and you want to expand, and you needed capital, you had to go to the banks.

Now the banks would decide how much money you could get, when you could get, and at what interest rate you could get. And that interest rate was astronomically high.

Siddhartha Ahluwalia 11:38

Like 15-20%?

Rajrishi Singhal 11:41

18%, 17%, 16%. And you had to then, you know, go, jump through multiple hoops to get that low. You could say, you know, I don’t want to go to the banks, let me go to the market.

You couldn’t go to the market. Because if you wanted to do an IPO, there was a Sarkari Babu called the controller of capital issues, who would sit behind a desk and decide how much money you can raise from the market, whether you could charge a premium or not. And whether you could raise money at all, and things like that. So the freedom was not there.

Siddhartha Ahluwalia 12:27

And I believe there was also curb on, if you are a car manufacturer, can you manufacture in a year 10,000 cars? If you have to expand your capacity, you have to take permission.

Rajrishi Singhal 12:38

Exactly, exactly. Yeah. So for everything you needed that kind of permission.

So that still exists. That was the Mai baap Sarkar. And that was not going away.

And the Sarkar, and there were also the government was spending a lot of money through subsidies, through handouts, etc. And that was creating demand because money, through money, people will buy goods, etc. And prices were going up.

So inflation was high. Government was borrowing a lot without any, you know, consideration for the future. And so, you know, fiscal deficit was high.

And that was putting the economy in a very difficult situation. So we were importing also much more, because when you have high demand and your production capacity is limited in the domestic economy, you have to import, right? So we were importing oil.

Siddhartha Ahluwalia 13:32

And it was causing that fiscal deficit continuously.

Rajrishi Singhal 13:34

Fiscal deficit and, you know, your external deficit also. So you are importing much more than you were exporting. So you had to keep borrowing to finance that gap also. And that is what pushed us into the crisis primarily.

Siddhartha Ahluwalia 13:50

There’s an interesting story. I don’t know whether it’s true or not. But it’s shown in movie Guru and talked about in media that, you know, Dhirubhai Ambani wanted to expand capacity. And he couldn’t get a meeting like the other ministers were not approving it because XYZ reasons. And then he went to Rajiv Gandhi, the then Prime Minister. And he said only one line that I have some, you know, something remaining from your mother. Let me know if you want to access it.

Rajrishi Singhal 14:17

Yeah, so this has been part of the Bombay folklore. Nobody knows how true that is. I’ve met Dhirubhai, but I’ve never asked him this question.

I’ve met Anil Ambani many times, Mukesh Ambani couple of times. So but I couldn’t ask them this question obviously. But I mean, yeah, so that was the kind of economy that existed then.

So they were able to expand a lot of capacity. And at that time, I remember in the 80s, late 80s, they were the subject, Reliance was the subject of a lot of raids. So the government at that time alleged that they had smuggled in excess capacity.

Now, which the money is challenged in court and all of that, of course. So how, what was the government’s, you know, reason for saying this because Reliance was actually, let’s say if they had 100,000 ton per year plant, they were producing 120,000 tons. So where was that extra 20,000 coming?

So the Reliance company executives explained that we are using certain chemicals. And that’s called a swing capacity in chemical plants. When you use certain catalysts, etc, you can push capacity.

Because this is not a mechanical plant. The chemical petrochemical plants that is the advantage and they may have had a point. So I don’t remember now where that case went.

But that was the allegation at that time, that, you know, so they are producing much more than what they were licensed to produce. Now, ideally, I mean, basically, that is what licensing, you know, creates these kind of distortions.

Siddhartha Ahluwalia 16:13

Virtual barriers.

Rajrishi Singhal 16:15

Yeah, so what licensing created many barriers. One of this is, you know, what happened to Reliance and many others, in fact, for instance, if you see till Maruti came along, we had only two car manufacturers, Fiat and Ambassador. And my dad worked all his life for Hindustan Motors, which used to manufacture Ambassador cars.

And I had asked him one day, you know, why don’t you guys change the design? I mean, you know, it’s so he said, No, we have a full-fledged design team. So I said, What do they do? He said, they change the grill in front.

Siddhartha Ahluwalia 16:59

When do you think really the concept of free market started to happen in India?

Rajrishi Singhal 17:06

So, the concept had been, you know, pushed during Rajiv Gandhi’s time. And thereafter, 80s is when we had this bunch of economists and advisors who came down from their, you know, various jobs overseas, and decided to come back to India, Montek Singh Ahluwalia, Shankar Acharya, Rakesh Mohan, all of these bright, brilliant minds, they decided to come back to India and work in the government. And they kept, you know, putting out policy briefs, papers, op-ed articles that these are constraints on the economy. So that idea was already there.

Siddhartha Ahluwalia 17:45

And you mentioned in your book that they used to also sometimes leak these to the media.

Rajrishi Singhal 17:49

Yes, exactly. I mean, having been in media, we know. Yeah.

So famously, Montek Singh Ahluwalia wrote this note for the committee of secretaries and for the ministers on the reforms required for six areas. And how reforms in these areas would really, you know, put the economy on a higher trajectory. It went to the secretaries committee, it went to ministers, and they turned it down.

And then lo and behold, it suddenly appeared as if, you know, in the express group, in Indian Express and Financial Express, a full thing was carried. So nobody knew what it was, it was called the M document. So many years later, everybody knew it was Montek Singh Ahluwalia’s policy brief.

But he formally acknowledged years later, that it was his brief, in fact. And so when the 1991 crisis happened, it made us aware of our shortcomings, and how we were close to bankruptcy of a country. Yeah, yeah, yeah, yeah, complete bankruptcy, we had money enough for just two weeks of imports.

Nobody was willing to give us a loan. We were looking around for a loan. And, you know, everybody said yes, and then went back on their word.

We got downgraded twice by the credit rating agencies. And I think the biggest ignominy was, when we wanted to pledge our gold. Usually, when you pledge a gold, you don’t have to move it physically.

But that year, because they were unsure of India’s status, and it’s, you know, that was the biggest blow for India’s ego, I think, when they said you have to move the gold physically.

Siddhartha Ahluwalia 19:46

To Bank of England.

Rajrishi Singhal 19:47

To Bank of England. And it really, really, you know, for the first time, the nation really felt belittled.

Siddhartha Ahluwalia 19:56

Embarrassed.

Rajrishi Singhal 19:57

Embarrassed.

Siddhartha Ahluwalia 19:58

And almost 50 years after independence, and you still have to beg.

Rajrishi Singhal 20:02

Yeah, yeah, yeah, yeah. So that crisis, I think, was the turning point for all of us.

Siddhartha Ahluwalia 20:10

And that you think that led to free markets in India?

Rajrishi Singhal 20:14

Well, not exactly free markets. But an attempt to move towards freer markets than what existed earlier. I don’t think free markets exist anywhere in the world.

Like you said, real democracy. Okay, I mean, you used another term, true democracy. So free markets is an idea that doesn’t exist anywhere in the world.

All markets have some kind of, you know, distortions, aberrations. And that’s the nature of markets.

Siddhartha Ahluwalia 20:46

But let’s say today I have to produce an electric car in India. Government might not give subsidy, but nobody’s stopping me to manufacture an electric car.

Rajrishi Singhal 20:56

You still need permissions. You’ll still need permissions from the center, from the state and the local authority.

Siddhartha Ahluwalia 21:06

That’s why all these Babus control.

Rajrishi Singhal 21:09

You still, those that control still exist. Okay.

Siddhartha Ahluwalia 21:13

If I have to build a new bank, I think India is the hardest country to build a new bank.

Rajrishi Singhal 21:20

Yeah, but we, I mean, we’ll come back to banks a little later. I’ll tell you. So I get asked this question a lot.

I was in Singapore promoting the book and there was a book discussion at Singapore Cricket Club. And I was asked that do you think India has enough banks? Before that in Bombay, in a private club called the Quorum also, we had a panel discussion around the book.

And again, the same question came, do we have enough banks? Think about it. How many?

So we have public sector banks. Then we have private sector banks. Then we have about 40 to 49 foreign banks.

These are commercial banks. Then you have small finance banks. Then you have payments banks.

Siddhartha Ahluwalia 22:16

Cooperatives??

Rajrishi Singhal 22:17

Then you have regional, rural banks. Then you have different grades of cooperative banks. You have multis, you have the state cooperative bank, apex cooperative bank, the multistate cooperative banks, the district cooperative banks, the urban cooperative banks.

This is all regulated by RBI. Then outside RBI’s regulatory purview are another bunch of 1 lakh banks or credit societies that exist.

Siddhartha Ahluwalia 22:53

These are non-banking financial companies?

Rajrishi Singhal 22:54

No, these are cooperatives. Okay. Then there are non-banking financial companies.

Siddhartha Ahluwalia 23:01

How many of these?

Rajrishi Singhal 23:02

Oh, there are, so I don’t remember the number offhand, but there are a lot. And most of them give loans.

Siddhartha Ahluwalia 23:10

I assume there would be somewhere between 50,000 to 100,000.

Rajrishi Singhal 23:13

I wouldn’t put it at that. So, you know, thing is, we are looking at effective operational NBFCs. There are many NBFCs on the paper, on the books, which are not operational.

So, and there are not regulated also. So, let’s, they can’t lend money. They have capital.

They’re shell companies. So, let’s not go there. But with so many institutions, and yet our problem is our credit per capita credit is really very low.

So, if you look at comparable countries, credit to GDP is much higher for every country than India. So, why do you think with so many banks, NBFCs, we still don’t have enough credit going out of the door?

Siddhartha Ahluwalia 24:10

Is it because of, they’re highly regulated? Credit should not be the problem in this case, if, let’s say, for every 100 people in the country, there is at least one such kind of financial institution. Every thousand people, I don’t know the exact number.

Rajrishi Singhal 24:31

Whatever it is, but there is, one is, people have not, I mean, in these institutions, except for say, the public sector banks have not invested in networks.

Siddhartha Ahluwalia 24:48

What do you mean by that?

Rajrishi Singhal 24:49

By let’s say, being going out meeting, you’re being very closer to the customer primarily. Right. So, that was left to the local cooperative banks, rural RRBs.

Now, their problem is, they lack governance, they lack capital. So, to be able to give loans of a higher order, you need that kind of capital. And one of the problems with most private banks in India, NBFCs, RRBs is they don’t have capital.

But the bigger problem for the cooperative banks and the RRBs is the presence of politics.

Siddhartha Ahluwalia 25:27

What is RRB?

Rajrishi Singhal 25:28

RRB, sorry, I should have said RRB is Regional Rural Banks, which were launched by a public sector bank and the state government.

Siddhartha Ahluwalia 25:38

So, SBI would have launched something.

Rajrishi Singhal 25:40

In say, West Bengal or in Andhra Pradesh with the local government, with the state government. So, the state government holds 50% and state bank would hold 50%. And they were supposed to go out into the regional rural areas, right?

They, at one point, there was a crisis with RRBs, because they were lending much more than the money they had.

Siddhartha Ahluwalia 26:05

I think some of our states really, they claim they are bankrupt today. For example, Karnataka, which is the IT capital of India because of Bangalore, the government says they don’t have any more money to spend. Similarly, states of West Bengal.

Rajrishi Singhal 26:21

Yeah, but that’s a different problem, I think, and that arises because they were used to a lot of the state taxes that have got merged into GST.

Siddhartha Ahluwalia 26:30

But they still get 9% if the GST is 18%.

Rajrishi Singhal 26:34

So, they are supposed to get it from the center, right? So, there are delays, lags, etc.

Siddhartha Ahluwalia 26:41

And the center collects the entire 18% and gives it back to the state.

Rajrishi Singhal 26:43

So, they are supposed to, but it comes with delays, lags, and you have these mismatches.

Siddhartha Ahluwalia 26:49

Such an electronic system, I believe there should not be.

Rajrishi Singhal 26:52

But there is.

Siddhartha Ahluwalia 26:55

Yeah, everything I buy, the GST is automatically put into it.

Rajrishi Singhal 26:59

Yeah, so that is one. But let me get back to this whole thing about RRBs and cooperatives. Cooperatives are controlled by politicians, mostly.

Siddhartha Ahluwalia 27:11

How is that possible?

Rajrishi Singhal 27:13

Because cooperatives is through, you know, it’s a bunch of people of the same society or the same locality or the same…

Siddhartha Ahluwalia 27:20

They would appoint the authority there.

Rajrishi Singhal 27:22

So, they would use their influence on these people to become the chairman of that cooperative bank or, you know. And if you see, most cooperative banks are controlled by politicians today. And I meant all parties, not just one party, but all parties want to control these banks.

Siddhartha Ahluwalia 27:40

Then if such as a poor state, then nobody would go to these banks to make their deposits. And if deposits are not there, how will they lend?

Rajrishi Singhal 27:47

Exactly. So, the trust factor is also a problem.

Siddhartha Ahluwalia 27:52

And because now even the larger private banks, let’s assume State Bank of India also, the top 10 banks in India, their tentacles are in villages, rural areas also. So, people would gravitate towards lower interest but higher trust. Who would interact with these small cooperatives?

Rajrishi Singhal 28:11

Right, yeah. So, borrowing from cooperatives at one point was very easy, especially if you knew somebody in the bank and, you know, it. But over time, I mean, I think it’s still easy, but the bank can only lend so much, right, when the demand is this much.

Or I think what is, you know, really required. So, you were saying, for instance, can, why don’t we have new banks? Why is it difficult to launch a new bank?

Now, my question there is, do you think a new bank, when it is launched, it will be able to build a footprint that is large enough to cover uncovered areas? Most new banks will want to set up branches in Ulsoor in Bangalore or MG Road in Bangalore or, you know, Nariman Point in Mumbai or Connaught Place in Delhi. They don’t want to go out of those areas, even though you have so many banks there, it’s overbanked that area.

So, private banks is not the solution, not the only solution. I’m not saying that they shouldn’t be allowed and there should be no restriction on them. I also feel that, you know, but there has to be some kind of understanding with RBI that, you know, okay, you can have branches in wherever you want in the urban areas, but you should have some, you know, network elsewhere also. And the problem is building that network requires capital.

Siddhartha Ahluwalia 29:51

Ultimately, the problem that we discussed about why is credit not enough in India, if you have to simplify the answer for that, what will that be?

Rajrishi Singhal 30:01

I would say that it’s not enough because banks don’t have enough capacity to lend, banks don’t have enough money to lend.

Siddhartha Ahluwalia 30:07

But that cannot be true because if you see Nifty 50, dominated by 30% to 40% it is dominated by financial institutions. The financial institutions are the most profitable enterprises in India, so how is that possible they don’t have enough money.

Rajrishi Singhal 30:23

But if you look at their profits, they are making money and their profits are, but if you dissect the profits, a large chunk of it actually comes not from lending, comes from doing treasury, let’s say foreign exchange trading, bond trading, getting fees for recommending or getting you to invest in some insurance product, let’s say they have a tie-up with an insurance company and when they convince you that you should invest in this insurance company they get very good commissions, or they have a tie-up with 2-3 mutual funds and when they convince you to invest in those mutual funds they get very good commissions. So fee income is a large part of their income today and I think over the past few years many of the large private banks are putting in a lot of effort in growing that business rather than the bread and butter lending business. Also at the same time, Siddhartha, the other problem is we do not have enough private sector investment.

Siddhartha Ahluwalia 31:43

What do you mean by that?

Rajrishi Singhal 31:43

In the sense that, so if you look at government money where it is being spent, a large chunk of it is being spent in building roads, dams, infrastructure, ports etc. and it’s a good strategy because when your economy is not growing enough and you need it to grow, typically governments start spending first, especially on infrastructure projects because these have long tails and it also gets the private sector to then come in and invest because when government is investing, so let’s say it’s building roads, cement company, it will buy cement for the road, it will buy people, it will employ labour and all of that is generating income. So people will then want new shirts or want to eat more, new pair of sneakers, whatever and so that will generate its own cycle of economic and so the private sector who sells sneakers or shirts will want to produce more because there’s more demand coming and he will then want to invest in building new capacity, expanding existing capacity but that is not happening despite government spending a lot of money and so therefore banks have seen that you know the demand from private sector corporate has been stagnant somewhat. So therefore they are now you know, A looking at fee income as a source of income and at retail loans, so making Siddhartha, convincing Siddhartha to borrow money to invest in the market, play futures and options in the market, they don’t tell you to play futures and options but a lot of.

Siddhartha Ahluwalia 33:43

Every time I go to a bank even for a small transaction that’s why I stopped going to a bank, they take me for home loan.

Rajrishi Singhal 33:48

How many home loans can I take? So that’s the pressure in the banks because private sector, the large corporates aren’t really borrowing to expand.

Siddhartha Ahluwalia 34:02

So we would have expected India to be in a much better position after 40 years of economy, 32 years of economy opening up. Why hasn’t that happened? Is it because we had not a constant government but multiple in and out of between NDA and UPA government?

Rajrishi Singhal 34:27

No, I don’t think it’s constant government change that is the reason, could be one reason but if you look at economic policy and economic reforms, nobody’s actually walked back on that despite different governments coming in over the past 30-35 years.

Siddhartha Ahluwalia 34:47

I’ll take some reference points here, I’ll take Southeast Asia as a reference point, I’ll take Japan as a reference point, I’ll take China as a reference point. When their economy wasn’t what we were at 1992, they grew to a 3.5-4 trillion economy much faster, we haven’t grown at that pace. So do you think or if it’s any use to compare because we are a completely different beast?

Rajrishi Singhal 35:12

So yes and no. So yes, we are a completely different beast and therefore we are not as homogeneous a nation, let’s say as a South Korea or as a Japan or even a China. But China is a completely different animal, we leave that out.

Siddhartha Ahluwalia 35:32

Nobody should compare them with China.

Rajrishi Singhal 35:34

Exactly, it’s a completely different beast, so let’s leave it out with a separate discussion for a separate day because it takes another 40 minutes if we talk about it. But so that is one but the problem I think is we haven’t really allowed, for one, we haven’t had a very mature private sector.

Siddhartha Ahluwalia 36:01

In spite of large conglomerates like Tata, Reliance, Adani.

Rajrishi Singhal 36:06

So the Tata’s for instance, if you look at their past few years, what is the big investment they’ve made?

Siddhartha Ahluwalia 36:15

I mean every sector like for example in jewellery they are number one with Titan.

Rajrishi Singhal 36:19

So how much of investment does that require?

Siddhartha Ahluwalia 36:21

I don’t know numbers.

Rajrishi Singhal 36:23

They invested in new auto car manufacturing at Sanand in Ahmedabad. What happened to it?

Siddhartha Ahluwalia 36:30

I don’t know.

Rajrishi Singhal 36:31

There’s nothing left because the car new model that they launched Tata Nano has now almost disappeared.

Siddhartha Ahluwalia 36:39

They could have transformed it to a better another car.

Rajrishi Singhal 36:42

Which needed fresh investment. So internally their internal dynamics whatever be the reason is what stopped them from doing this. So as I was saying there has not been adequate investment from the private sector in India. They have rather invested overseas.

Siddhartha Ahluwalia 37:01

Really? Like these companies have invested?

Rajrishi Singhal 37:03

Many of these companies have built capacities overseas.

Siddhartha Ahluwalia 37:07

Any examples?

Rajrishi Singhal 37:09

Oh so you’ll see the number of Tata acquisitions overseas over the past 30 years. Steel in Singapore, Steel in England, Tetley they acquired and so a lot of investments.

Then Jaguar Land Rover which is an overseas investment and I’m not saying just them. I mean even if you look at a middle-sized company like let’s you know Welspun or whatever. Many of these companies have built manufacturing capacities overseas.

Siddhartha Ahluwalia 37:45

Why not India?

Rajrishi Singhal 37:47

So one is because it is difficult to invest in India and you know get returns because of what we spoke about earlier. The corruption angle is a it looms large okay and so if your returns are going to get impacted by you know corruption, then you might as well invest abroad. There’s corruption overseas also but you know once you make the payment then everything falls into place smoothly.

It’s not a ongoing business corruption.

Siddhartha Ahluwalia 38:19

But let’s say for a normal person sending money outside India through liberalized remittance scheme or for a company to do OPI or overseas direct investment is ODI right or OPI. It’s very tough. How are these companies then allowed to move money in India to outside India?

Rajrishi Singhal 38:39

Yeah Yeah. It’s a very good question. What they allowed I mean you know so many of these companies earn surplus overseas like exporting when you export you’re able to keep some of that money you know legitimate okay and you can use some of that money and then you borrow also right.

Siddhartha Ahluwalia 38:57

You’re saying whatever they earn overseas they keep it overseas and reinvest it overseas they never bring it back to India.

Rajrishi Singhal 39:03

Not all of them and I mean not all of it but in some cases that is the.

Siddhartha Ahluwalia 39:07

Let’s assume majority of it.

Rajrishi Singhal 39:09

I don’t know I don’t have the data so it would be wrong for me to say how much you know but in some cases that is definitely the case you know but that is what has happened. That is one. Two is many companies also invested overseas because they wanted to be in the market they want to sell to and they were facing problems of selling from India, exporting from India.

So there were global trade restrictions. So variety of reasons. So again going back to your original question of why growth not happening.

I think one of the big factors is what we started off this conversation with which is corruption and that is like a factor that is depressing investment or entrepreneurial energies.

Siddhartha Ahluwalia 40:02

But are we not seeing enough foreign money also coming into India like Amazon setting up in India, Flipkart getting bought by Walmart.

Rajrishi Singhal 40:11

But yeah but that’s happened right. It’s done story. There’s no fresh investments coming in.

We are a 1.4 billion economy where 1.4 billion people are eating, are wearing clothes, are going to school, buying notebooks, buying books, watching television, needing health care. All of that requires demand. Commuting, going on holidays and yet we don’t see enough FDI coming in and that is because foreign investors at least the people I have spoken to are scared of investing in India because they feel A corruption, B sudden movements by government, unplanned shocks to the system.

Siddhartha Ahluwalia 40:59

Like examples?

Rajrishi Singhal 41:00

Demonetization is a good example. It was a shock to the economy and we still not recovered fully from that shock and it came like a bolt from the blue and overseas investors are not used to such you know sudden policy reversals.

Siddhartha Ahluwalia 41:16

I still don’t understand looking back in hindsight what effect did demonetization cause, positive effect.

Rajrishi Singhal 41:23

I would say none except political maybe. It paid off some political dividends I am told because there was UP elections that year and they won the UP elections that year.

Siddhartha Ahluwalia 41:38

But it caused such a turmoil in the economy, it was as equivalent as COVID, I remember.

Rajrishi Singhal 41:43

Absolutely, so for the unorganized sector, for the tiny sectors, small scale, medium, everybody got affected and that shock was followed by a half-baked GST program. I think GST is a good product, I support GST theoretically but I think it was too soon to introduce that kind of GST, having already imposed demonetization. If you didn’t have demonetization then maybe yes you could have done GST and slowly remedied, rationalized it and improved it.

Siddhartha Ahluwalia 42:22

Two shocks continuously to unorganized sector.

Rajrishi Singhal 42:24

Exactly, and so that is one of the main reasons why foreign investors are reluctant to invest in India.

Siddhartha Ahluwalia 42:31

But foreign investors belong to the organized sector, right? They don’t have to deal with the unorganized sector.

Rajrishi Singhal 42:36

No, they don’t but the shock doesn’t impact only the unorganized sector, it impacts the organized sector also. So imagine a medium-sized manufacturing or a small-scale manufacturing company, I mean you are a venture capital, if you had put money in let’s say a small shoe manufacturing company, that period would have given you nightmares I’m sure, right? So likewise any foreign investor who wants to come and set up shop to manufacture let’s say switch gears or shoes or you know circuit break, what have you, I’m just saying you know anything under the sun, the entire spectrum is available.

They will have to think twice because it would mean a big shock to the system, it would mean cash flows disruption and it would affect their working, they’re not used to working like this. So and demonetization is just an example, our political system loves giving these shocks, these unannounced sudden shocks.

Siddhartha Ahluwalia 43:40

Why is that?

Rajrishi Singhal 43:41

I don’t know, I mean again I think maybe it’s part of our DNA that because we’ve always been in control, you know.

Siddhartha Ahluwalia 43:50

The Mai Baap Sarkar notion, right? Because we need to show that we are the Mai Baap.

Rajrishi Singhal 43:54

We are strong, we are in control and you know we can do things and we do not then consult enough. I mean one of the things if you see reforms during coalition governments have had the most success actually. Why is that? Because when you are…

Siddhartha Ahluwalia 44:14

I thought it would be opposite because anything to pass during coalition is very tough.

Rajrishi Singhal 44:18

That is what the common perception is, right? But if you are a coalition government and you have a reform idea, you have to get buy-in from everybody first.

Siddhartha Ahluwalia 44:27

Yeah, so for example demonetization could not have got a buy-in from anyone. It was a sudden 12 pm shock for GST was a shock for everyone. Right? These wouldn’t have gone through.

Rajrishi Singhal 44:37

Right?

Siddhartha Ahluwalia 44:37

Was P V Narasimha Rao’s government a coalition government?

Rajrishi Singhal 44:40

Yes, it was. Okay, it wasn’t a majority government.

Siddhartha Ahluwalia 44:43

Was Rajiv Gandhi’s government also a coalition government?

Rajrishi Singhal 44:45

No, it wasn’t. It was a majority government. But even after say PV Narasimha Rao, the United Front government which had first Deve Gowda as Prime Minister and then IK Gujral as Prime Minister, even that time they had lots of reforms and those reforms endured.

Siddhartha Ahluwalia 45:04

But I think that would have been the worst government because Mulayam Singh Yadav was the Defence Minister.

Rajrishi Singhal 45:11

Yeah, but so that period, you know, the Finance Minister had to sell reforms to all the constituents. And once he had buy-in from everybody, they are trusted.

Siddhartha Ahluwalia 45:22

Yeah, I get it now. So once, because through trial and error, you have tested it so much by the time it is out to public, it is fully baked.

Rajrishi Singhal 45:30

Yeah, exactly. But today what is happening is you see, though the past say two months, a lot of policies of this government had to be either changed or withdrawn.

Siddhartha Ahluwalia 45:41

Like example?

Rajrishi Singhal 45:44

So for instance, you have seen the unified pension scheme launched, right? So earlier they were saying, no, NPS is the best system, you know, we shouldn’t tamper with it, we shouldn’t do anything. But because of the election results, they are now forced to come out with this, right?

A number of things, I mean, let’s say the capital gains tax on real estate, they had to roll it back because of, you know, popular demand. So if they had, you know, discussed some of these things, maybe with members of the opposition, different parties.

Siddhartha Ahluwalia 46:23

Your thing today is much better than the last 10 years of the BJP government, because they have two populist leaders, Chandrababu Naidu and Nitish Kumar as part of the central government.

Rajrishi Singhal 46:34

A, B, so there are sounding boards, right, which they didn’t have earlier. So there is, you know, there are partners who are willing to say this far and no further. And that is a good thing.

But what they also need to do is also now take the opposition into confidence.

Siddhartha Ahluwalia 46:55

Yeah, the opposition is very strong right now.

Rajrishi Singhal 46:56

Yeah, so take them into confidence. Restart the parliamentary committee system. So you will, when you have a reform idea, and you get, you know, feedback, inputs from all kinds of people, your policy framework becomes stronger.

It becomes much more acceptable, much more sellable. And I think, hopefully, this is what is happening now.

Siddhartha Ahluwalia 47:22

So you’re thinking this five years might be much better than the last 10 years?

Rajrishi Singhal 47:26

Could be, yeah. I mean, this is too early to say, but the science as available today.

Siddhartha Ahluwalia 47:32

But at least the sounding boards are two populist leaders.

Rajrishi Singhal 47:36

Right. Yeah. So there are people who are willing to give you inputs now, you know, which may not have been available to you earlier.

Siddhartha Ahluwalia 47:46

And why would they? I want to continue this conversation for next time, because we want to make it, you know, well packaged this time. I think we have been able to achieve this goal, right?

Make the conversation really crisp for the audience. There are many more questions to come. And in the next episode, you know, I want to discuss with you, how have BSE and NSE grown, right?

You know, is, you know, some of the conglomerates like Adani are on the same path as Kingfisher or not, right? And, you know, the rise of, you know, so for example, there is no middle business there. Either they are very large top 10 conglomerates, and then there is SMB.

Where is the middle? And I think that we are consistently missing. But where is that headed?

I want to discuss these topics in our next episode, along with you.

Rajrishi Singhal 48:42

Certainly.

Siddhartha Ahluwalia 48:43

Thank you so much, sir. It’s been a pleasure hosting you. I had so much fun.

Rajrishi Singhal 48:47

Thank you.

Siddhartha Ahluwalia 48:47

I learned so much.

Rajrishi Singhal 48:49

Thank you, Siddhartha. It was great fun doing this. Thank you for having me.

Siddhartha Ahluwalia 48:52

Thank you, sir.

Rajrishi Singhal 48:53

Thank you.