Prime Minister Narendra Modi’s second US visit comes at a time when the global economy is mired with an uncertainty over the timing of Fed rate hike, China slowdown, currency war and of course the big questions over the pace of reforms in India. Ahead of Modi’s arrival in New York, Bloomberg TV India caught up with Arvind Sanger, Managing Partner, Geosphere Capital, and Shaurya Doval, Director of India Foundation, to get a perception of foreign investors about India’s reform pace.

Hours before the Prime Minister lands in town, there is a lot of buzz just like last year. Shaurya, how are things looking as far as the emerging markets basket is concerned? India, seems to be standing out and differentiated from the rest. Is that an assessment you currently share as you have been here for a few days?

Shaurya: I completely agree with you that in terms of emerging markets, India is looking attractive. In my view, this is a window that has opened up for India and the nation must make the most of it because we live in a world of relative opportunities and costs. So absolutely, India is very attractive at this point in time.

Is that an assessment that you share Arvind, that India is very attractive?

Arvind: There is a window of opportunity here because of China’s slowdown, commodity price correction, oil price correction, and growth which seem to be more internally driven for India than almost any other emerging markets in the world. So all of those factors are coming together along with one of India’s major headwinds going away, which is inflation. India is probably uniquely positioned on an interest rate cutting cycle ahead of it and all of those provide room for optimism. Although let’s be clear, India’s own recent performances notwithstanding the official GDP numbers has been disappointing in terms of corporate earnings performance and probably the old GDP numbers would reflect lower numbers. Having said all that, I think the opportunity is there for India.

Shaurya: I just want to add one more thing to what he said that while the window is open, it is at least that is what I heard when I spoke to investors in last few days is that it is not a natural corollary that India will benefit because of this. India still needs to up few things to be able to make use of this opportunity that has opened on the macro side.

What are those few things that India needs to do at this point in time?

Arvind: Well, I think clearly what India needs to do but will happen as a natural consequence, is obviously the monetary cycle easing. But it’s not enough.

Tell me about the monetary cycle a bit more because that’s one of the hot issues that everyone is talking about back home.

Arvind: I think Indian corporates are over-focused on the monetary cycle. I disagree with the idea that if Raghuram Rajan cuts interest rates, everything would magically be right in the Indian economy. I think that’s an unfair pressure to put on the RBI and on Rajan.

And Rajan recently spoke about the interest rate lobby. That’s what he was referring to?

Arvind: I think that a lot of things need to happen. I think corporate capex needs to pick up. I think the government’s infrastructure capex — whether it is on road or it is on rail or it is on other infrastructure projects — we are seeing some signs but more needs to happen and that will drive the positive momentum because right now we can point out lot of negatives right there. The real estate is in tight spot and corporate capex is extremely slow to recover because there is still surplus capacity. So we need to see some elements of the virtual cycle. Clearly, some amount of urban consumer spending is picking up. There are signs of recovery. We need to see more of that virtual cycle.

Why isn’t corporate spending picking up? Recently the PM spent some time with leading Indian companies.It almost seemed like a Pehle Aap situation where companies said the Govt needs to do this and the PM said they needed to focus on creating jobs by investing in India. But that investment from India Inc doesn’t seem to be really taking off.

Shaurya: I think there are two or three reasons. The first one being that they are seeking confidence. They are seeking confidence that the macro policies of the government will actually

translate into a change on the ground. Therefore, from an investment perspective, they will be able to make these investments on a long-term basis.

But Shaurya, there hasn’t been a government in the recent past which has been so confident at least in terms of its absolute majority in the lower house of Parliament.

Shaurya: From the corporate point of view, you are right. But, from the same view, given what the companies have gone through in the last 10 years, they are very defensive at this point in time. They need more hand-holding and a little confidence for them to actually start believing they can open their purses. Secondly, many of these corporate have very leveraged balance sheets. They actually do not have the capacity to spend unless there is significant equity infusion in them which goes back to the point that Sanger was also making in terms of their ability to attract huge amounts of capital particularly in the equity markets so that these companies do need some kind of recapitalisation at the equity level on their balance sheets. The third point which we eluded to in the last question in the US visit is that the interest rate regime in India still continues to be reasonably high from the perspective of the corporate being able to sustain and manage that kind of debt level. So we do need some monetary easing from the RBI for those benefits to translate to corporates for them to be able rework their capital structure. Now, the RBI has many other reasons on why it may not lower the interest rate. But, I am only answering this question from a purely corporate perspective and why in at least my assessment they are still reticent. You know they can see the opportunity, they can see the stability of the government, but they still cannot fully sort of step up to the play. So, I think it’s a combination of both intention and also capability.

Arvind: I would add a couple of important things. The government needs to do something with the banking sector. There is a bad debt problem. There is a balance sheet problem. There is a lack of capital with PSU banks and I don’t think that we have seen it comprehensive enough. We have seen tinkering at the edges but not a true comprehensive policy to either create a good bank or bad bank or some way to significantly restructure some of the banking loans. And particularly, we talk about loans of some of the corporates. But a major sector that is in a problem is loans to the state electricity boards and the distribution companies and that’s a major road block. People talk about the steel sector, metals and the infrastructure life cycles and leveraged companies. But the growing problem that is getting larger which is also affecting other parts of the economy is the power sector.

The government has been focused in improving the coal delivery but that is not the problem today. The problem that needed to be solved in 2013 or may be in the first half of 2014 was fixing the balance sheets of the state electricity boards and coming up with a comprehensive solution. That is important to fix some of the logjams. One of the important points is corporate capex. Many corporate have enough surplus capacity that there is no need to do capex. So it’s going to be somewhat limited in terms of the amount capex of the corporates can do. So, the government infrastructure projects will drive some of the capex cycle and that could then drive in the corporates.

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