'China Will Have The Last Laugh'

“China will deceive many people about its fall but my guess is they will have last laugh,” says Nilesh Shah, Managing Director, Kotak Mahindra Asset Management

In the first-part of the interview with BW|Businessworld, Nilesh Shah, Managing Director, Kotak Mahindra Asset Management talks about why India’s strong economic fundamentals are still elusive from global funds and how China still remains a force to reckon with.

Key Takeaways

• Ensure that China exits out of benchmark indices ( emerging markets indices) as it is more of a developed nation and less of an emerging market

• How FII should make more money in India? The Maruti Suzuki example

• China will make the transition from investment lead growth to consumption lead Growth.

• China used its pile of foreign exchange reserves to tackle the NPAs to ensure that Chinese banks are the biggest banks in the world.

• When China grow at 6 per cent on $10 trillion economy they are adding 25 per cent of current India every year. If we grow at 10 per cent on $2 trillion economy we will add 2 per cent of Current China every year.

Globally, India is seen as just another emerging economy. The fact is that its fundamentals are in much better shape and even its growth is surpassing all other emerging markets. Would you agree and what will make global players to increase allocation towards India in their emerging market basket?
India looks better vis-à-vis peers like Russia (oil price drop and political concerns) Brazil (populist policies and graft concerns) and China (slow down & excess capacities) with strong economic parameters. Indian inflation is coming down. Both the deficit are under control and growth is picking up. Today our issue is most of the good news are reflected in prices with huge overweight position by FIIs compared to our weightage in the benchmark indices.

We can increase FII allocation to Indian equity by various means. One way is to ensure that our potential gets converted into performance and we become fastest growing economy in emerging market with strong corporate earnings growth. The other way is to ensure that China exits out of benchmark indices as it is more of a developed nation and less of an emerging market. One more way is to market Indian potential by showing Maruti Suzuki example. Maruti sells automobiles in India. Suzuki sells it worldwide. Maruti pays royalty to Suzuki. Suzuki owns more than half of Maruti. Despite that Maruti's market cap is higher than Suzuki. We have to go and tell the FIIs that you have a choice of investing in Parent company listed in global markets or invest in their subsidiaries in India. If you invest in India you will make more money.

The bubble in china has burst. Chinese economy is under pressure and several indicators are signalling further slowdown. Consumption takes a hit and thereby the bottom-line of companies. Will China according to you play spoilsport or Chinese government would be able to sustain the fall?
I have read many people saying China will go bust. I think it is a one sided view. China has achieved what no other country has achieved. They were smaller than India in the 80s. Today they are five times bigger than us. They have more than 3.5 trillion dollar reserve. They have a focussed and committed leadership which is now talking from big is beautiful to less is more. China will make the transition from investment lead growth to consumption lead Growth. The transition will be painful and slow but they have the resources to make the transition. We need to remember that there were lots of concerns on NPAs in Chinese banking system few years back. China used its pile of foreign exchange reserves to tackle the NPAs to ensure that Chinese banks are the biggest banks in the world.

Another thing to remember about China is that when they grow at 6 per cent on $10 trillion economy they are adding 25 per cent of current India every year. If we grow at 10 per cent on $2 trillion economy we will add 2 per cent of Current China every year. China will deceive many people about its fall but my guess is that they will have last laugh.

How crucial is job creation in a growing economy? Do you think it’s happening in the way expected? Which are the sectors that can lead the way in job creation?
We are creating jobs but at a much slower pace than required. When we have a young country it is important to create jobs. We have majority of population working in Agriculture sector where there is a lot of disguised unemployment. We need to create jobs at a rapid pace. Jobs will be created based on how we develop our manufacturing base and our services industry. We have seen jobs creation in IT and BPO industry at a rapid pace in last decade by becoming back office to the world. We will have to focus on how other sectors like textiles, Construction etc can build scale for the world. One important thing which can usher in jobs is supporting entrepreneurship. Today the Unorganised Sector is burdened by high interest rates. If we can reduce interest cost for them and provide them financing at cheaper cost millions of entrepreneurs will blossoms and create jobs.

Watch out for second part of the interview tomorrow to read Nilesh Shah’s view on Markets in 2016, sectors to benefit from Modi’s government policies and most importantly what is holding back Indian investments.