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Let Us Look At The Economy In The Medium Or Long Term & Not Just The Near Future: U. K. Sinha

Sinha also discusses at length the challenges thrown up by the Covid-19 pandemic, the plight of the MSMEs and the leadership traits the times demand.

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Upendra Kumar Sinha is a former chairman of the Securities and Exchange Board of India (Sebi), who headed a committee set up by the Reserve Bank of India to study micro, small and medium enterprises (MSMEs) in 2019. Since then Sinha has authored a book titled Going Public. In a conversation with BW Businessworld, he suggests that government largesse to uplift the economy come with a sunset clause.

In his dialogue involving BW Businessworld Chairman and Editor-in-Chief Annurag Batra and Abhinav Trivedi of BW Businessworld, he also discusses at length the challenges thrown up by the Covid-19 pandemic, the plight of the MSMEs and the leadership traits the times demand.


Annurag Batra: It is being estimated that India’s GDP and the Indian economy is being eaten up by the Covid-19 pandemic and is already eroded to the extent of 15 per cent to 20 per cent. What are your assumptions and what should the government do to get the economy back in shape?

U.K. Sinha: The Covid-19 pandemic has impacted the entire world. The world over people perceives a difficult situation created by this pandemic. The pandemic has not differentiated between rich countries or the developed countries and the poorer ones.

There is now consensus that this year is going to see a contraction in the world economy. The World Bank says that the world economy will shrink by about three per cent. And the International Monetary Fund (IMF) came out with a forecast about India where they have said that growth in India may be in the   range of 1.8 per cent or 1.9 per cent. India and China are the only two big countries that may not be impacted much. But if the lockdown gets extended week after week, we might see more contaction in the Indian economy.

Let us see how the efforts of the government and all the citizens of the country take shape to ensure that there are fewer job losses, that people don't starve, that people don't suffer from hunger, people don't go back to the poverty level or from it to below the poverty level and things like that. So, the important point is that in recorded history, this is perhaps for the first time that such a large, uniform impact has taken place from a pandemic or from an event, to affect the whole globe. And in that situation, India has to take certain decisions. The world has to take certain decisions.
If you're also asking me, what India should be doing? Then you may have seen that the Government of India has come out with a package of announcements of about Rs 1.7 lakh crores, which is about 0.8 per cent of India’s GDP. But if you compare this with that of the rest of the world, especially what developed countries have done, I think, we have just made a beginning.

If you look at what we need to do, you need to look at some of the numbers. India has so far rightly concentrated on tackling the spread of the disease and then, taken some difficult measures, which for any large democratic country, was very difficult. And we should commend the government for taking these measures with the full support of the people of this country. The second thing is social protection. The people should get food. Most of these areas we have worked on. One area where the government has shown its renewed interest and more focus is the problem of migrants.

There is no central monitoring of the internet economy. The Centre for Monitoring Indian Economy (CMIE) came up with a forecast that 14 crore Indian workers in the informal sector had either lost their jobs or are in the process of losing it. This is really a vast number, especially when you look at the composition of the Indian economy, because the economy, which is the formal economy, has comparatively fewer jobs. So now is the time for the government and the Reserve Bank of India to jointly work on how to provide support to and revive businesses.

Handholding the MSMEs

Annurag Batra:  How can the MSMEs survive? What can the government do so that the MSMEs, which are big employment creators and in some way are the backbone of the economy, stay vibrant?

UK Sinha: The MSME sector is a very, very critical sector for India, by way of their contribution to the GDP, employment and exports. What has happened so far in this country is that some of the measures that the Reserve Bank of India (RBI) has announced, are taking time to reach the MSME sectors. The important and critical thing is that either because of the lockdown or lack of labour and manpower, most MSMEs have not started operations. Some that have started operations, face raw materials problems, are uncertain about key issues.

Once the government is convinced that the spread of the disease is controlled or contained area by area or to a specific area, it will start loosening the restrictions and operational difficulties will be removed. But the important thing is that financial support for the MSMEs are yet to come, and the support has to come. For example, even prior to the lockdown, there was a problem with goods supplied by the MSMEs to the large corporates. There were delays in payments. Now because of this current situation, those delays have got longer.

So there has to be some new scheme for the MSMEs in the report with which I was associated last year.  We have given some suggestions. One suggestion, for example is to allow invoice- based financing or cash flow - based financing, which I think can be done through technology. And I'm aware that there are a number of technology providers, who have done almost everything to kickstart this operation, but this will happen.

We have to realise that in the last ten years, the percentage of funding the MSMES got from banks has come down. And the NBFCs (non-banking financial companies) have emerged as significant financers of the MSMEs. Many of them are providing comfort to the MSMEs by simplifying the process of financing. And I must tell you also that last year when I was associated with the RBI’s committee on MSMEs, all the representatives of the MSME sector, irrespective of the branch or segment of industry they came from, highlighted that the NBFCs actively support them. So, we have to ensure that the NBFCs start some sort of a line of relief or support to help the MSMEs.
The third point I would like to make (and this is also one of the recommendations we made in the committee) is that all MSMEs have access to a distress fund. When we submitted the report last year, no one in the world had imagined that there will be Covid-19- like pandemic, but we knew that there may be natural calamities and other disturbances, when MSMEs may need support. That is the reason why we had recommended a special Distress Fund of Rs 5000 crores.

I think the time has come to create that fund immediately. If such fund exists and is run on public-private grants, then it can provide the nucleus for more funds to come. And once that happens, a lot of MSMEs can be supported. Another point is that there are some extreme cases and we feel that the government should also take some sort of equity interest in some of the critical MSMEs. And lastly, there is a need for some sort of credit enhancement or some sort of credit guarantee. I believe that the government is seriously considering it. And I do hope that it is provided. So, if you take up a series of Rs 4-5 million and you give an assurance to the industry that they are welcome to come forward and start operations, we are confident that the MSMEs will be back on their feet once the pandemic is under control.

So, with whatever operational support is provided, the MSMEs will again start growing and it is very important to take those measures because of the impact the MSMEs have on the country.

Liquidity in the Market

Annurag Batra: What do you recommend to ensure that the financial services have access to funds? What are the things that are not being done yet to bring more liquidity into the market?

U. K. Sinha: Let me give an example of the orchard. When water flows from the top to the bottom, it first pumps to the level of the ground which is the highest. And once that level is reached, it comes to the next level and then to the lowest level. The liquidity issue of the financial market is exactly like the flow of water. I suspect the word ‘liquidity’ may have originated from there, for it has the same characteristic as water.

In the first week of April, we had some instances in the government securities market, when some states could not raise the money that they wanted to. Also, a large govt backed PSUs which had AAA rating could not raise money. But these problems started getting sorted out by the end of the first week. Then there was the question of whether the other AAA bonds would be able to raise money. With the second announcement, the AAA bonds are now also getting money. But the problem is that a substantial part of the bond market in India is below AAA. Now most of the MSMEs, NBFCs we are talking about are in that range. And what has happened is that the mutual fund industry, for example, has invested in those bonds.

So, as a policy decision, the RBI did some targeted liquidity management, and said that this money should go even to the bonds that are below the AAA rating. But there are two operational issues here. Imagine yourself to be a banker, and especially if you are a public sector bank, if you can lend to a AAA company, why would you lend to anything below that? So, there is also a fear of action and that fear has been there for quite some time.

The second issue is that because of the market conditions, there is something called the flight to safety. So many people, many corporates, who have surplus money, are trying to park that money with the banks. So, the bulk deposit rates of the banks have come down drastically.

So as I speak to you there is a marked differential. If you who are the State Bank of India or the Bank of Baroda, then the rate at which you are getting bulk deposits from depositors, is much lower than the rate at which the RBI utility package has been given to you. So there is an operational issue. That if I can get a bulk deposit at 3% why should I take something at 4.4% for the same purpose.

That's why we have a very peculiar situation that, Instead of lending to the NBFC industry, or the industry the bankers are parking the same money back into the RBI. I'm sure the Reserve Bank and the government are aware of this problem. I'm very hopeful that this situation will be sorted out. Once that happens money and liquidity will flow to the larger sectors.

Annurag Batra: If you look at the markets today, they too are coming down. Of course, you could always say that there is pessimism everywhere around the world. If I may say so, there seems to be a flight to safety or risk coverage here too.

U. K Sinha: I would not like to comment on specific companies. But I think the investors (and there are global investors who have an interest in Indian companies) are looking for the right signal from the government’s rescue package. They are looking for the incentives that governments have provided in some countries like the United States and the United Kingdom. So, people are waiting to see how committed the government is and how committed the central bank is to revive the economy. I'm sure, and I'm hopeful that very soon those signals will start coming.

Let me remind you that in his first address to the nation, the Prime Minister used the word “yuddh” (war). He said that the struggle against Covid is a war. So, my expectation and my hope is that we will see the same war- like approach in reviving the economy. And once that happens, the first signals (of investor enthusiasm) will start coming and there will be a lot of confidence in the market. Another thing we must observe here is that in a time like this, when the global economy is going down, the Indian economy too is facing challenges, Corporate performances will not be at their best.

So, my feeling is that instead of comparing with past performance, we start comparing relative present performance and see which companies and banks in the world or in India and which MSMEs are doing better. So basically, the market and its analysts will just start analysing what is more efficient and more productive. Once they make this analysis, they will start investing their money.  So the companies have to be more productive. They have to be more efficient.
The point I'm making is that people and companies have to show that they can adapt with this adaptability of the country, adaptability of the leadership. That is also going to play a role.

Abhinav Trivedi: Investment was already on a downhill when the novel coronavirus pandemic broke out. Mutual fund investments were down. There was a lot of negative sentiment in the market. What kind of communication would you say, needs to come from the government and institutional investors to restore the confidence of the middle classes in investment and in financial investment tools available in the market?

U. K. Sinha: I have two observations. The government and the Reserve Bank of India have shown their commitment towards saving your Investment and my investments when the RBI announced this special Rs 50,000 crore line of credit & special liquidity facility for mutual funds on 27 April. Imagine this has come on the heels TLTRO announcement announced on 17 April. To me it seems that both the government and Reserve Bank of India are keen that markets function normally. If there are any temporary issues and challenges, those challenges will be handled.

My second observation is that nobody has ever seen something like this. This is something that is unprecedented. In this situation, some companies will be winners and some economies will be winners. And some may have to lose out unless they are very productive, have tried to change their business model and tried to be adaptive. So, these are the things that you have to keep in mind? that this is a very, very serious challenge. I mean, you can't blame the RBI and the government of India for this problem.

Abhinav Trivedi: I remember in November 2019 you mentioned that a weaker bond market is a national challenge, which eventually affects debt mutual funds as well. Do you think something needs to be done to make the bond market in India strong now that investment in debt mutual funds is at an all-time low?

U. K. Sinha: Investment right now being low is natural. If you look at the global data, you will find that all over the world, people are withdrawing money from debt mutual funds. So, this is not something that presses a panic button for me. This is natural. As far as the development of the corporate bond market in India is concerned, in the last five or six years, we have made substantial progress. I remember for the CY 2016-17 and 2017-18, the total money raised by the corporates in India from the market, which includes corporate bond market, IPOs and money invested by the venture capitalists of the country was higher than the net expansion of bank credit. This is a remarkable thing that has happened in front of our eyes.

So, a number of steps have been taken. I am not saying no further steps are required. We have to take some measures to create more liquidity in the secondary bond market. We have to have some credit enhancement schemes. My feeling is that in normal times and even if we didn't have the Covid sort of an effect, these things would still happen. And I'm sure that once the Covid impact is under control, those measures will be taken again. So there is no one solution for developing the corporate bond market.

And let us also not forget that the secondary market, even in government bonds, is not very active. We are talking of the corporate bond market, but even the government bond market, the secondary market is not very active. There is a little bit of activity compared to the past on account of foreign portfolio investors being brought in here.  Another thing that I would recommend is participation of pension funds in India and the participation of the insurance companies in India in this segment has also got to further improve.  

The Stimulus Package

Annurag Batra:  The consumption of oil has gone down because there are no flights and no vehicles. The money that comes in from liquor sales has gone down. The money that comes from sales into the GST has gone down. The government's coffers are not really overflowing. So, should we tone down our expectations from the government?

U. K. Sinha: There have to be some scenarios we need to look at. Are we looking at a scenario where the entire country will be out of the lockdown on 17 May and then normal business activities will start, people will either go back to their jobs or are we expecting the lockdown to be extended to June or beyond.

Or are we expecting the third scenario if the disease is controlled right now, But in winter we have another round of its coming and all that. So, depending on these scenarios, we can have a projection on how much revenue the government is likely to get and what measures are required. I will make a very small point here, because I see that some economists and some representatives of the government have been saying that the government will be worried about the fiscal deficit because credit rating agencies will downgrade it. My answer to such an argument is that even if you do nothing, you try maintaining fiscal deficit you are unfortunately going to have a situation where people are going to lose jobs.

Already as per the CMIE, 14 crore people have lost their jobs. We were discussing a short while ago how many MSMEs have shut shop or are finding it very difficult to start their operations. So, it is one thing that the revenue of the government will go down in the near future, but I would argue that let us look at the medium to long term.

The job of the government is not for the next few months or the next six months. And if you look at beyond two years, you will discover perhaps, that it is better to do what is best and to do it fast to provide all the support necessary to restart the economy, to improve our job situation. Because if we don't improve the industrial situation, if we don't have tax collections, our fiscal deficit will be in stress. So my point is that it is better for the welfare of the people of this country and the medium to long-term growth of this country that we provide some supports right now. It should not be later.
I'm not worried about credit rating agencies. They will have to change their model. They work on certain models and they statistical models which are  based on the pre- Covid situation. If they are considering downgrading a country like India, I would like to ask them, ‘which other countries in the world,  according to them are AAA or AA and  how we are not’. We are in a very, very difficult situation. It is a new normal. So, I'm saying that the government should also start engaging with sovereign rating agencies, and tell them that what are the other options before us, and the reasons we are doing what we are doing.

However, I have one caution and this caution comes from my experience in the Government system when the global financial crisis was happening in 2008. I am of the view that the government did a very good job in coming out with the stimulus they provided in 2009. But in my opinion, they didn't realise when they had to withdraw that support. Withdrawing the stimulus, in my view, was delayed. So, what I'm arguing here is that ? do it? but make it targeted and make it time-bound and outcome bound.

You should know that there is a sunset (clause) in this. People should know, the industrialists and the business people of the country should know, that there is a sunset. So have a number, have sunset and ensure that the support is given in a targeted manner.

Leadership and Inspiration

Annurag Batra: What is your personal leadership style? And what are your predictions for the future?

UK Sinha: I would like to say that people in any large system or a corporate system, should know how to work in a team. Leadership doesn’t work if you are not a team player, howsoever talented you may be and no matter what ideas you may have. My approach has been that I take my team forward together. And I've been lucky that I've got the support of my team wherever I went, no matter how difficult the situations were. We all worked together.

When I talk about the team, I obviously mean people who are talented, they should feel that they are being recognised. They should feel that their efforts are being recorded. There should be some sort of fairness. You have to be fair, you have to be transparent. And that is what helped me. I have shared some instances about leadership and teamwork in my book (Going Public).

The important thing is that you should work in a team. You should be proactive. You should try to get expertise from the sector you are in. There should be confidence that you are on top of things and that the whole organisation should be behind you.

Your predictions for the world & Economy

UK Sinha: Besides the geopolitical challenges we are facing, the way people work, will undergo a complete change. A large company like TCS has said that its workforce will be asked to work from home for at least the next two years, even if the situation normalises. So, there is a major change in the way society in India uses to function. Then what happens to all of the office spaces? What happens to all the transport requirements? All these things would have to be re-written. AI & Big Data will drive changes in the future.

 With these what would perhaps, have happened in a very gradual manner over a period of three to five years, has happened overnight. And it has just hit the people ? 14 crore people so far in India, and maybe even more that we don't know of.  We know what CMIE is saying, so that has happened. So, the way I foresee the future for India in the immediate future is that the job scenario, the business scenario, the way we work, the way industry works, including your industry, will have to find a new way of working.

They will have to adjust and adapt and those who adapt fast and those who remain productive, will definitely survive. This is one important message that I would like to give, that people have to be adaptive. People have to be productive. And people have to know more than what is required. For example, there is news from Wuhan in China that once the changes were introduced, and people were allowed to travel and go to work, the demand for buying cars has gone up in China. This is counter-intuitive, but there is a reason behind it. The reason is that people don’t want to use mass transport, so they are buying cars.

So, we don't know about all the changes in the behaviour of the people and the industry that will take place after the Covid-19 pandemic. I would say that economists, journalists, business people, should start thinking of these trends. We should start imagining India in 2021. And then decide what measures are required.

But I'll add one word of caution here. We have to be very sensitive. We cannot talk of a solution where a vast majority of people lose their job. We have to keep our huge manpower productively employed. And that's a very difficult task. So, for example, in this context, I will say that there may indeed, be re-training of the people and re-skilling. This is going to be a massive challenge.

Abhinav Trivedi: What kind of leaders do we need in India today? Do we need more specialists or Jack- of- all- trades?

U. K.  Sinha: Let me give you an example. I would like to compare the government or the machinery of the government to running a large corporation which is in the business of producing multiple products. Someone is producing software, someone is producing computers. The government is not servicing only one sector. It is involved in multiple sectors starting from education, health, sanitation, child care, healthcare, urban development and scientific development, making spacecraft, fighting enemies of the nation, maintaining internal discipline and law and order. So, the government is like a corporate which has multiple products. Now you look at the companies which are in the business of producing multiple products. For example, if there is a company producing a car, steel, or software, who do you think should be heading that company? A software specialist? Or car specialist?

Similarly, the important thing here is that the person, who is heading that company, must have leadership qualities. You should be tested on these leadership qualities. And one of the requirements of industry is to acquire new knowledge. If you are in a company that makes everything from soaps to morning cereals, the leader may not have expertise in making soap, but may be an expert on cereals. But that is not required. What is required is what sort of a leadership quality you have and what’s your experience.

One of the important things is that people should have experience in working at the ground level. And the same thing happens in the Indian bureaucracy. So, whether you should be a specialist or a generalist is not the right question. The right question is whether people being selected in different ministries or in senior positions in government in various ministries are being selected in a fair manner. Are there any restrictions to bringing the right people in there?  If there are restrictions, then those should be removed. But when I say this, I mean that if something has been reserved for a type of people, then that restriction should be removed. So, the best should be selected in a fair manner.

So the important thing for us to remember is that options should not be closed, but the right talent should be picked. And if you like, there are people who are monopolising their positions by virtue of a particular service that they have joined. Then you have a point, and I argued that they should be removed. But you cannot have a rule that everyone in a leadership position has to be from a particular background.

Looking Ahead

Annurag Batra:  I talk to a lot of people because of what we do. There is a mood of despondency. People are a little fatigued. People are a little unsure. People are sad. What would you say to cheer them up? Why should they be more optimistic about the future?

U. K. Sinha: There is an element of economics and psychology and sociology in your questions. It is only natural that people are feeling sad and depressed. Every day you hear stories that are depressive. Thousands of people are dying. Migrant workers are in all sorts of difficulties. They are cycling hundreds and thousands of kilometres and are dying in the process.

But the point is that humanity has been through crises in the past. India has faced crises in the past. This is the most serious crisis. For example, India had not taken contaminant measures before. India has not been in lockdowns before. I shudder to think of the impact on business right now.

And I also must say that a large democratic country like India? people in this country ? have behaved very positively and supported government measures. There have been isolated instances of confrontations, but most people have supported this. So, I see the book flip and I'm an optimistic person.

This is a crisis, but this is a crisis for all of humanity. Our people are well educated. People have very good technology. They are well connected with what is happening outside India. After all, we have been the technology providers for almost the whole world, but we have to get our act together.

My only advice would be that since this is something of national importance and impacts the national consciousness, the people of India should resolve their small differences right now and work together so that people in India are safe and are able to bounce back economically.

Annurag Batra: Tell us about the people you have looked up …  

U. K. Sinha: I will hesitate to name people, but I can tell you what I look for. I admire people for their actions, for what they have done. Yes, and I'm talking about public service. And the qualities I look for are how sensitive they are, how much they care for the people of this country. To what extent can they solve their problems, how committed they are, how sincere they are. I have learned from such people. I think having faith in basic human values, having faith in constitutional values and being sensitive to people, being sincere to the task, are the things that I look for. These are the things that inspire me.

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