Economy needs a fiscal stimulus: Uday Kotak
Financial sector needs nurturing. Commodity cycle being modest is good for India, says Kotak
What is the engine of India’s growth? What is ailing India’s growth?
In many ways what we are seeing is challenges to the financial sector. That was one of the important agendas on the new government’s plate and I am very hopeful and confident that the new government along with the regulators -- RBI and SEBI -- will find and evolve appropriate solutions to sustainability in the financial sector. That is the key engine for India’s economic growth.
But we are already seeing a lot of pain points. Look at what is happening with auto sales, real estate sector. While RBI is trying out of the box measures, how bad is the situation?
First of all, liquidity has improved. High quality NBFCs are beginning to get finance at lower credit spreads and we need to divide the liquidity issue into availability and price. On the price front, one of the things which is holding back the price of money is the fact that we also have a significant small savings growth in the Indian economy which is funding our fiscal deficits at rates higher than deposit rates. That is making liquidity available but the price of money is moving less fast than it should in terms of cost of money and transmission of the RBI rates.
The second one is availability. This is now Indian economy and the Indian financial sector is evolving. Savers and investors are getting smarter and if for an institution, higher availability becomes a problem, the marketplace is choosing between good quality financial institutions and others. From a long term point of view, discerning investors are good for economic growth.
What a lot of people have feared is that the contagion from IL&FS was contained on account of elections now that elections are over, will the entire problem be revealed as how bad it is and how deep the rot is actually? Could we have a cascading impact which is a big threat to the economy?
My view is the problem in the financial system overall is not systemic. There are pockets of challenges but it is not certainly something which needs to become a contagion and I do believe that the government along with the regulators can manage the transition with some appropriate steps as we go forward.
What would those steps be?
The steps which I would like to see going forward is a) ensure that different fiduciaries in the financial system -- be it governance of financial institutions, auditors, rating agencies or regulatory oversight -- in addition to the managements and boards of the companies, should do their job appropriately.
It brings me back to what is a very important statement by the Prime Minister which is sabka sath sabka vikas sabka vishwas (Progress with everybody, trust for everybody). The financial sector and corporate India needs to build vishwas (trust) with savers and investors. Trust is extremely important and one of CII’s key themes in the current year is building trust between industry, government and society.
You have not talked about taking tough decisions. There could be write offs. Certain NBFCs could be allowed to fail. Does that have to take place?
We need to evolve the transition. There is no one solution for everything but you got to look at it granularly and specifically in each case and ensure that we contain the challenges in the financial sector. But I do believe we need to nurture and grow the financial sector because if India aspires to 9% to 10% GDP growth, the financial sector is the key catalyst for that growth and it has to step up on the plate and increase its contribution to funding and supporting the Indian economy.
Budget is on July 5.th Last quarter, we saw sub-6% growth after a very long time. What would your expectation be from Nirmala Sitharaman come July 5th?
My view is that with a set of policies which I am sure this government is aware of as we know they have a 100-day as well as a longer plan. I do believe that we can manage to move the Indian economy to a 7% or a higher growth on weighted average basis. We may be starting slow, but we can always pick up momentum through the year and we have got a long time ahead for the rest of the year.
But she has to pump prime the economy because the private sector is still being quite stubborn on that fact and this fiscal consolidation and all of the bond markets will cry hoarse if the fiscal deficit target is missed.
We are going to get some animals spirits back and time has come for us to see how we use the levers of some fiscal stimulus within a range.
So we need a fiscal stimulus?
Within a range. I do not think we should go overboard. A tandem between fiscal policy and monetary policy is like perfect Indian music.
But what is the point of another rate cut if it is not going to be transmitted?
The transmission is extremely important and which is where I believe the small savings rates in the economy, which is the rate at which the government is borrowing from small savings like National Saving Certificates and all those are getting disproportionate flows which are funding the fiscal deficit. Deposit rates are finding it difficult to go down and therefore we need to for transmission to get the overall alignment.
Are you expecting a rate cut this week?
The market consensus is that there should be a rate cut and I am sure that the RBI is conscious about the economy but let us wait till the 6th of June.
Is there any update that you can give us on IL&FS which is something the markets are watching out for?
The financial sector needs nurturing, hand holding and enabling growth to be able to support the real economy. I am always a believer that the financial sector does not have a life of its own. Its basic job is to serve the real sector. But it is a huge positive. Commodity cycle being modest is good for India.