Managing Director of Kotak Mahindra Bank, Uday Kotak who took over as the new President of the Confederation of Indian Industries (CII) is confident that the Indian economy will bounce bank and has charted out a 10-point growth plan for the same.
In an exclusive interaction with CNBC-TV18's Shereen Bhan, Kotak spoke at length about how India’s growth would get back on track.
Read on for the complete transcript of the interview:
Q: PM Modi's clarion call to industry leaders at CII was that he is confident of getting growth back, but according to a Reserve Bank of India survey, consumer sentiment is at a historic lows -- at least the lowest recorded in six years, there is worry about financial security and job security, private investment is anaemic, banks are still parking more than Rs 6 lakh crore with the RBI, how do we start to get the growth back?
A: I think there is a short-term (measure) and there is a medium-term (measure). In the short run, the focus has to be lives and livelihood and in that context... supporting lives, protecting them both from the virus as well as from loss of livelihood and of course livelihood itself should be the top priority and for that, the CII view is we need to do whatever it takes to protect these two and that is really the immediate and short-term (measure).
Q: What is "whatever it takes"? Especially in the short-term?
A: As we now move to Unlock 1.0 and we are gradually going towards unlocking, we are seeing pent-up demand manifesting itself in pockets. What we need to do is to time the next round of spending or support. Post the pent-up demand rise we can see some dip. I believe sequencing and timing is extremely important for getting the demand side sorted out.
Simultaneously, one of the other behavioural changes which is being noticed is that not many people are spending the money being put in their bank accounts. A lot of people are conserving cash and that is a consumer behaviour change. Therefore only by putting money into the pockets of people does not mean that people go out and buy. It is about psychology, it is about the consumer feeling comfortable and that is what the real issue is. It is as much a mind game as it is the real world game.
Q: Let us address the real-world game first, I will address the mind game in a bit. As far as stimulating demand is concerned, do you believe that a cash transfer is the way to go? What is the quantum that industry is now expecting in terms of the next steps to stimulate demand?
A: The cash transfer to the bottom of the pyramid is a fair way to go because the impact is highest at the bottom of the pyramid. However, in addition to that, there is demand from industries particularly with reference to jobs. Many industries from an economic point of view may need to tighten their cost structures. Therefore, should there be potential job cuts, there has to be protection for people; therefore, either government pays industry and those jobs continue or else if those jobs are lost there has to be a social security measure which the government may want to think about because the core to it is the industry has to get more efficient and in the interim, the friction with jobs is what we need to protect.
Q: Let us address the issue that you have raised -- the possibility and the prospect of job losses because the industry is possibly going to try and bring down cost as much as possible, but so far the government hasn’t stepped in. The big demand, even before this financial package that was announced, was that the government should provide some sort of a safety net or the government should step in with some sort of a wage or salary support which hasn’t happened. So what leads you to believe that that is still a realistic expectation and what is the quantum that you believe is necessary?
A: Again you are going back to some of the basics. If you look at the fiscal deficit envisaged before COVID-19, it was -- Centre plus states put together -- 6.50 percent of GDP. The current numbers estimated by economists are more like 11 to 12 percent of GDP. So we are already 5 percentage points higher than the original estimates. If I convert it in terms of the fiscal stimulus -- because that is the amount of loss the government is taking, whether it is revenue or whether it is cost, due to COVID -- it is Rs 10 lakh crore. That is 5 percent of 200 lakh crore of GDP. So Rs 10 lakh crore effectively is the pain which the government has taken because of COVID and protected the economy.
Now the question is beyond 11.50 percent, how much more can we do and how relevant is it for us as a country to maintain the balance between fiscal deficit and macroeconomic stability. We are fine on the external front, but on the domestic front, the numbers which are now talked about in terms of borrowings as a percentage of GDP, government borrowings, I think we are coming to a number now in excess of 8 percent. Therefore it is important for us to get the equilibrium right and there will be a lot of noise from various quarters to spend. Therefore, choosing the right spend and the right time is crucial.
Q: If I then hear what you were saying to me, you believe that given where we now find ourselves on the fiscal deficit, the fact that public debt to GDP is in the highest as far as the emerging markets are concerned, that you understand the constraints the government is dealing with and you believe or you realistically don’t really expect any big spending further from here on?
A: It depends on what we consider as big spending. Let me give the example of what the government has done with MSME. Rs 3 lakh crore guarantee package, and I think it is a great package, I believe it will get used by September and Rs 3 lakh crore is without putting any pressure on this year’s fiscal deficit because it is a guarantee. Now, in reality, over four years not all of the Rs 3 lakh crore will be lost, there will be a significant percentage of that money which will be paid back by the MSMEs, therefore the actual losses to the government will be a fraction of the Rs 3 lakh crore.
Further this loss if any will be spread out over four years, therefore, a total of Rs 3 lakh crore of liquidity is being made available to MSMEs today, but the fiscal pressure of that is zero in this year and probably whatever that number is spread over four years. So we need to think creatively as the government has done in the case of the MSME package – provide the boost without disproportionately loading the fiscal deficit.
Q: So what could the creative ways be of dealing with the fiscal deficit? Is there a need for additional spending? The option of monetising the deficit and getting the RBI to do so, where do you stand on that?
A: You fully understand the distinction between primary and secondary markets. There are two ways by which investors can buy paper. Number one is primary and number two is secondary. What we are talking about is monetisation of deficit in the traditional sense, which is primary buying of paper by RBI from the government. I do not think that is needed or advisable.
The current methodology where RBI expands its balance sheet through open market operations (OMO) is the appropriate way of expanding RBI’s balance sheet. Therefore, the government of India places its paper through a public fair market auction on the market where investors buy the paper and thereafter the RBI provides an open market operation facility and buys back some of that paper from investors. That is still a monetisation of the deficit because it is expansion of RBI’s balance sheet, but it is not a direct purchase by RBI.
The problem with the direct purchase by RBI in the primary market is there is no fair price discovery and number two, there is the danger of this becoming a habit. Therefore, from a discipline point of view, continuing with the practice of a secondary market placement by the government, and RBI expanding its balance sheet through the OMO is a much better way to monetise deficit.
Q: I want to now address the second point that you have raised and that was the mental game, so to speak. Now one of the challenges that the industry is going to have to grapple with is the crisis of the labour. You have seen migrant labourers face a complete crisis of confidence, return back… We don’t know what the implications will be of this reverse migration in the short to medium term. What do we do to ensure their return and do you believe that the industry and the government have failed them?
A: First of all, in my life, I have always considered migration to happen -- which is rural to urban -- because urban India offered a lot more opportunity and therefore people from villages and small towns aspirationally moved to urban India and cities. Over the years cities became overcrowded and the migrant labourers, a lot of them, had to stay in slums and chawls with poor living conditions.
Number two, the jobs they have got are relatively not secured and therefore many of them are day-jobs and post COVID, some of them lost their jobs overnight and to top it all, the risk of the virus in the cities has been much higher because you are staying in a slum or a chawl where a bathroom is used between thousand (read ‘many’) people and therefore with that additional medical risk, a migrant (labourer) has taken a call as an individual citizen of India that “I am not ready to take this health risk, quality of life issue and insecurity of my job and I am much happier even if I make less income back in my village where I feel more secure, my health risk is lower and I don’t have to worry about quality of my life relatively”.
Migrants have taken a choice like every Indian… This is also an opportunity for us to redefine the rural-urban rebalance and in the world of broadband connectivity, if we can get skilling and health spending particularly in villages and towns of India at a speed over the next 6-12-18 months, we can actually create a much more balanced economic growth for India and this is our opportunity to do it, put money into villages.
Q: You are talking about this reverse migration and being able to look at the distributed workforce and actually setting up workplaces in rural India. But considering the infrastructure and lack of private sector investment so far in large parts of rural India, how realistic is that over the next 6-12-18 months?
A: I think we should spend on rural infrastructure if we have a medium-term challenge on the fiscal deficit. Think about e-medicine, think about e-health, setting up of health facilities, setting up of education facilities on a medium-term basis. We have always underinvested in some of these. We have always said we don’t have the money now, we will do it later.
The time is now, we need to redefine the rural-urban balance and instead of once again trying to hope and force migrant labor to come back into cities, we first need to ask the tough question. Are corporate India and Indian businesses ready to improve the conditions of the work at which we expect the labor to come back? It is not easy to get them back unless we have a significantly better economic position for them to come into.