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Sentiment has improved and now liquidity is the key: Rashesh Shah, Edelweiss Group

ET Now|
Sep 23, 2019, 01.13 PM IST
Rashesh Shah-1200


  • Tax cut is a calling card for a lot of FDI into India.
  • In next 3-4 months, we will start seeing activity.
  • Last 25 years' growth story of India has to continue for the next 25 years.
There is a clear signal that the government will do whatever it takes to make sure that the India growth story does not get hampered, says Rashesh Shah, Chairman & CEO, Edelweiss Group. Excerpts from an interview with ETNOW.

Everyone has applauded Friday’s bold move by the government. What is the next step? This bold move may just not translate into reality. Corporate India may secretly not start spending. What is your view?
I would think so. Over the last three-four weeks thanks to government interacting with the companies and investors and taking a lot of proactive measures, the sentiment was starting to change and as we know, the market ultimately needs three things. We need sentiment, we need liquidity and we need the fundamentals.

The sentiment has started to change. Liquidity has improved but we need to do more. So I would say the next important step will be the RBI October monetary policy. I do hope that they cut rates aggressively. I hope for about 50 bps cut and also OMOs by RBI to inject liquidity in the market. Though there is liquidity, the credit markets are fairly choked and clogged and we need to unclog them. The government expanding from the fiscal policy and RBI expanding from the monetary policy, both combination could actually turn around and bring back the animal spirits and also bring investments and consumption back into the economy.

When will it start? Could it take six months, three months or will FY20 be a lost year? The real impact and the real on-ground activity will start somewhere in March-April next year?
It should start in the next three months. As I said, liquidity is now the key. Sentiment has clearly improved and we can see that it is not just the stock market movement but even amongst companies and investors, there is a clear signal that the government will do whatever it takes to make sure that the India growth story does not get hampered.

In the last few months, India growth story was losing its sheen. Investors were questioning whether India is really a growth story. Over the last week, it has been communicated to investors that India will go for growth and if it means to loosen the fiscal purse, we will do that.

If it means giving a lot of incentives for fresh manufacturing capacity, we will do that. So, all of that, including the trade war going on, the new companies paying a lower tax is a big boost. I think in the next three to four months, we will start seeing activity and announcement as the mood changes because we have gone through almost a year of this slowdown.

Last year, slowdown started from October onwards with the IL&FS episode. The base effect will also kick in. Post December, things will start looking even better from YoY growth point of view, from numbers point of view and from activity point of view also.

What about investment? How do you see a pickup or a revival? The government is clearly laying out the red carpet and hoping that this will lead both in terms of private sector capex and bring in investment into India?
Investments require both sides -- the corporates willingness to invest but also the availability of credit and liquidity from the banking system. For the last few years, because of the NPAs, banks did slow down their credit growth. In between, NBFCs had stepped up but even NBFCs for the last one year has slowed down and have not got liquidity for credit growth.

The willingness will come back not only form Indian corporates but more from FDI and foreign investors. We are seeing a lot of interest from overseas to come and invest in India. But it will be also a function of the liquidity and credit flow availability. We need to match both their demand for investment and the supply of capital for investments also.

This is turning out to be one of those omega moments for equity markets as well. When you thought the equity markets are down and out, is this what you needed to revive sentiment?
Absolutely. There was a complete swing of the pendulum from sentiment point of view and we have always seen that when anything is overdone and I do think a gloom doom the pessimism was overdone. In my 30 years I had not seen the kind of gloom doom that was being articulated in the last three months.

I think it was overdone, but government action has to be commended because they did go out and say that we will do whatever it takes. I think this was the “whatever it takes” moment for India growth story. That has been the biggest change in sentiment that people have revived confidence and India growth will eventually come back.

It may not come back immediately, it may not come back in the next couple of months but India growth story is not over and we will do everything to make sure that the last 25 years growth story of India continues for the next 25 years.

Tax was a challenge. I mean a 10% tax which was acting as a serious problem in terms of getting that sector business or making that company efficient or cost effective?
I do not think tax itself was a challenge but what had happened in last few years was corporate profit as a percentage of GDP has been falling consistently. In 2007-2008, it was close to 8%. It has now gone down to 3%. So the corporate surplus -- because ultimately investments need equity and retained earnings -- were drying up slowly and steadily. This kind of a cut would leave a lot more capital in the hands of the companies to invest.

Along with that, the psychological and the sentimental part, that the government is investment friendly and wants to revive investments and is willing to make compromises for that is also very important.

We should commend the government because after the budget they quickly heard the industry, spoke with investors and realised that we have to improve profitability and a tax cut is one of the best ways to increase profitability. In fact, the government has not resorted to saying we will spend more money. What they have said is we will put more money in the hands of corporates and allow them to invest. So, that is a good thing because usually corporate investments can be more efficient than productive in the long term.

Along with that, what is happening is that in all the other Asian countries like Vietnam, Indonesia have all been cutting corporate tax rate to invite more investments, especially with the trade war between China and US. If you cut tax rates, it also becomes a calling card for a lot of FDI and new investments to come in. In a way, tax cut is a catalyst as it allows more retained earnings and more FDI to come in.

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