The Hindu Business Line : ‘The key is to stimulate investment and demand in India’

Mumbai, July 2 Mr Ajay Srinivasan, Chief Executive, Financial Services, Aditya Birla Management Corporation, believes that India has a lot of things going in its favour right now even while the rest of the world is falling apart. It is his view that the risk appetite is coming back in the markets. Mr Srinivasan, who has spent 10 years in the financial services industry at a leadership position and seen the industry undergo many a change, spoke to Business Line.

Is liquidity alone driving the markets?

That is what you are seeing today. The fact is people would have best been neutral to India. You are slowly seeing the risk appetite coming back which is normal after 12-15 months of a crisis. People are now looking for assets which will give them slightly higher returns and emerging market equities are a key component of that. Russia is badly impacted after what happened in oil. So, it really boils down to China and India.

China has to make a huge change— to move from being an export-oriented economy to one which has to kick start its domestic consumption. India is in a wonderful position where everything was working well and the only doubt was around elections. And, with the Government getting a clear mandate, a resurgence in market happened.

Are today’s valuations justified and do you see a bull run in the horizon?

I agree that fundamentals do not justify valuations. But then there is so much liquidity and risk appetite that people are willing to wait a little longer and view financial year 2011 results rather than financial year 2010. Where can one find a place in which you have a GDP growth, rising consumer base and higher consumption? I think the pick up in the rural economy is what many other countries do not have today. Besides, India has low exposure to the external world, a positive bias to currency with good inflows, an investment demand kicking-in and result-oriented stimulus packages.

Do you see a correction post-Budget?

I think the market is solely driven by liquidity and when this happens it is difficult to take a call. Not many people participated in the big rally from 8,000 to 14,000 and I think those people are looking for an entry point.

How do you explain the fact that India and China are seen as the epicentres of growth and decoupled from the global meltdown?

Coupling happens because of the flow of money. Nearly 65 per cent of the money pulled out last year, is back in the first five months of this year in emerging markets as a whole. Money is like a tide— it sweeps in and out. That is what causes the coupling and decoupling rather than the economy as such. We are not insulated.

Being primarily export-oriented, China is now looking to stimulate domestic consumption. In India, the key is to stimulate investment demand to sustain our future growth.

As an asset-management company what are your strategies?

In China, 80 per cent of incomes go into bank deposits while it is about 55 per cent in India. So the money sitting in banks is still a large part of consumer savings. The big opportunity for financial services companies is to channel that money into other forms of savings and investment. Our strategy centres round creating financial awareness/literacy across our retail base. Here, you need products that address their needs.

Do you think there is an opportunity to bring down distribution costs?

I don’t think the cost of distribution in India is high. It appears high because it takes time to build scale. I think our cost structures are pretty low in mutual funds and insurance. For example, Singapore pays twice as much commission as India. In mutual funds, it is 1.25 per cent management fee, which goes down to one per cent over Rs 100 crore. In Hong Kong and Malaysia, to buy an equity fund, you will not pay less than 1.75 per cent. In Hong Kong, if you buy a China fund you pay two per cent management fee.

FIIs have been the prime movers of the market. Do you the see the inflow continuing after the Budget?

Nobody predicted any of the events over the last 15 months or expected the scale and speed of the rally we have seen. But generally, there is a lot of liquidity. So I think you will continue to see interest in places like India. The opportunity lies in how to create structures that allow you to attract investment.

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