At an e-Adda held last week, Uday Kotak, MD & CEO, Kotak Mahindra Bank, and President, Confederation of Indian Industry (CII), spoke on the impact of Covid on the economy, risk aversion among banks, and how technology will drive business in the future.
At an e-Adda held last week, Uday Kotak, MD & CEO, Kotak Mahindra Bank, and president, Confederation of Indian Industry (CII), spoke on the impact of Covid on the economy, risk aversion among banks and how technology will drive business in the future. Uday Kotak was in conversation with Anant Goenka, Executive Director, The Indian Express Group and P Vaidyanathan Iyer, Executive Editor (National Affairs), The Indian Express
On the economy and where we are headed
First of all, I want to say that maybe there was a good reason why people called hindsight is 2020. Who knew that 2020 was the year we would be looking at as a turning point in our lives. And the good news is, we are coming in, we are now in the last quarter of 2020, and we should soon be saying, ‘Hey, this is what happened in 2020, in the rest of posterity’. There are two parts to this — one is about lives and second is livelihoods, and the both are interconnected. From a global point of view, it is quite amazing that, you know, the East of the world seems to have handled the Covid situation much better than the West, for whatever reason. It’s just a pure fact of data. I think both Europe and the US probably took it easy early, then got it a little later, maybe relaxed a bit and seemed to have got it again. Who knows whether it’s linked to the weather and colder weather makes it more prevalent. From an Indian point of view, I do believe that the last one month in particular gives me hope and confidence that we seem to have got our net positivity rate now coming down pretty sharply, and overall active numbers lower, our death rates are lower. And I would just hope and wish that post the festive season, India maintains discipline across, as each of us make sure that the virus does not hit us back… For a while we started with the lockdown, at that stage it may have been necessary. We were also in a whole new era, but we’ve now come to the reasonable clarity that lockdowns are not sustainable as we go forward. And we will have to find ways of living with this phenomenon, irrespective of our ability to close down the country, and getting that livelihood part is going to be important. And how do we ensure that simple things like social distancing, washing hands, masks, we just follow religiously across every part of our day-to-day being to have a situation where it does not hit us back. And if we can keep our rates under control, post the festive season, I think that would be the best hope and a prayer we can do for India at this stage.
On why geography is now history
So I’m dividing the situation into two parts — on the health and the science part we have to be clear that the final solution is either a vaccine or a cure. So the health and the science part, we are still away from that solution, whether that happens in first quarter, calendar 21, second quarter, calendar 21, time will tell. But science is still catching up. On the economic side, I think we’ve got a better handle of the situation compared to April or May. On the economic side, things are looking better. And between April and May to October, most of the data is clearly better. And I think you can see that. There’s also some structural shifts, which we are in the middle of. One is, I think, a very important part of life which is changing and which is very evident. I call it ‘geography is history’. I can be sitting in any part of the world, any village of India, and I could be serving any other part of the world. So, this dramatic and profound change, which we are going through, can be significantly positive for India, if we play it well. I am very optimistic about that. And second, which I think is going to change, is this divide in India, between rural and urban. All our lives we have seen migration of people from rural India to urban India for growth and prosperity, I think that can change fundamentally. Connectivity is in place, as long as we can provide education and skills, a person in a small village can do a job and serve any part of India or any part of the world. So both these are very profound changes, which will work to India’s advantage if we get it strategically right.
On the impact of Covid and two-speed recovery
There are many parts of the economy which are actually benefiting, but there are some parts of the economy which are still facing jagged edges. Therefore, if you take the aviation sector, the tourism sector, the hospitality sector, and some general services sectors, they are still under the pressure of Covid. But if you take the manufacturing sector, which includes consumer goods, pharmaceuticals, e-commerce, IT, digital, telecom, all these sectors are actually doing better. And you’re therefore seeing a two-speed world as we are going forward. What we have to be clear about is the organised sector in general is in a better position than the unorganised sector.
On providing safety nets for those left out
This is as deep and dramatic a change as probably the Industrial Revolution was. It really changed the way humanity worked, it did lead to a lot of displacement, but at the same time it created new opportunities. At the same time, we have to find a safety net for people who will be left out in this. There are people who will be left out and we have to go out there and find appropriate safety nets for them, which includes training, rescaling, support and financial support. I think we as a society must do that. At the same time, we must be with the winds of change and adjust to the new flight path.
On strong companies gaining market share in the pandemic
I think if there’s one thing which inevitably happens when you have a turning point in history, is that normally the strong becomes stronger. This is at some level the classic Darwinian situation, you know, survival of the fittest, which is playing out in the real world. It is here that society, governments and people from business need to work together to find a supporting system for the overall society. But I also want to tell you, what is going to happen is that even the so-called successes better be on their toes. What seems like a very solid position today can be disrupted much faster. So it is not a smooth ride for many, many years — the space, the speed of disruption is going to happen at a much faster rate. And you’re seeing it in sector after sector. I mean, even if you look at the media sector, globally, in this epidemic or pandemic, I believe some of the major media players, whether it is The New York Times, The Economist or FT (Financial Times), they have actually benefited out of this and have consolidated their position because people want credible news. The credibility, brand combined with superior execution on digital in the new world is going to be very important.
On support for stressed sectors
See, there are three legs to this. I will just go to macroeconomics and then the specific issue which you’ve raised about supporting the bottom of the pyramid. I think first on the macro side, externally, India is not fragile like it was, say, in 2013 or in earlier periods when our balance of payment and current account position was weak. This time around, on an external account, India is strong financially. We have about 550 billion dollars of reserves, we will this year have a current account surplus, balance of payments, the world liquidity is so high that you’re seeing a flood of money which is coming into India, and we must encourage this because that helps us even being stronger on the external account. There is no threat to India’s external financial balance sheet, which is a big plus. We are also helped by the fact that oil is low and gold imports have dropped, which are two major items for India’s imports. So a strong external account is a very good position for us to be. However, we do have a challenge on the fiscal side because we came into this Covid situation with a high combined fiscal deficit between both the Centre and the states. Now numbers may vary, but it seems that our consolidated fiscal deficit is probably in the range of around 12 to 13 percent between Centre and states both put together. This translates to a higher level of borrowing as a percentage of GDP and government borrowing as a percentage of GDP globally. And for a country like India, people say that we have to start getting careful, the moment we get into the 80s, and we should certainly avoid the nervous 90s. Okay, so that is in the domestic fiscal situation. In the monetary policy situation, we have seen a lot of steps which have made liquidity significantly available, and it’s available pretty widely to NBFCs (Non Banking Financial Companies) and others. It is also available at much lower interest rates. Today a home loan is available at below 7 per cent per annum, I don’t think we have heard it for a long period of time at those rates of interest. So combine this excess liquidity with some fiscal stimulus and a good external account, it’s a good time for us to be seeing how we percolate it down. One of the schemes which was announced by the government, which is known as the MSME scheme with a corporate guarantee or ECLGS scheme, where banks could give money to MSMEs guaranteed by the government, about one-and-a-half lakh crores is already used by MSMEs, which has actually protected some of the MSMEs from going out of business. My view is, and we have recommended it from CII as well, that the government had given a guarantee of up to three lakh crores of which one-and-a-half lakh crores is being used for that. And from CII, we have recommended that the balance one-and-a-half lakh crores could be used for guarantees to be given for supporting the stressed sectors, whether it’s aviation, hospitality, real estate, or tourism, how can we use the balance guarantee scheme which was totally for three lakh crores, to give guarantees for support of credit to be given by banks to these weaker or stress sectors. It’s a recommendation which we strongly believe is appropriate for our time and we must give a chance for the stressed sectors to have a hope to live through this. So when times get better, they have an ability to fight back and survive. And this kind of step will also help protect jobs in many of the stressed companies in the stressed sectors.
On the reluctance of banks to lend
In general, rural and semi-urban India has done better than urban India. In general, I think the most vulnerable part of society today is an unsecured urban consumer. That is where a significant amount of pain has been felt, because urban India was not ready for coping up with a Covid kind of situation. Coming to the point on risk aversion, we are finding that the behaviour is a two-way situation. First, we’re finding even the salaried employees are keeping a lot more balances compared to earlier times, from their salaries. They are spending less. Now, if you take the cumulative effect of spending less, if they spend less, it is somebody else’s income which is gone. Second, we are finding that, in general, as companies in the organised sector, and each of the companies, and I’m sure that is true for all of us, as we try and become more efficient in this Covid period, we cut marketing spends, we cut other spends. Reduction of somebody’s cost in business is reduction of somebody else’s revenue. So that is another reality which will happen because that’s human behaviour. Even if you get more money, consumers are spending less than before. It is here we also have to keep in mind a sharp reduction in interest rates will help, because that reduces the burden of the consumer. But the fact of the matter is, compared to April-May, in October we’re finding more confidence. Now I’ll give you sectors which are really doing well, which were a question mark. If I look at, say for example, the construction equipment sector, which is road construction, mining construction — I was talking to JCB, a company which provides road construction equipment — they are showing 35 to 40 percent growth YOY (year-over-year). That means road construction and mining are moving and that creates jobs. Tractor industry is doing extremely well. Passenger cars have come back, people are wanting more self-use cars. I believe the residential home sector is making a gradual comeback because of a variety of reasons. Number one, the rates are low, home prices are lower. For a change, unlike in the past, a ready home is available, you don’t have to wait for under-construction, you can get a home immediately with a discount which the developer is more ready to give now. And fourth is in places like Mumbai, stamp duty has been cut from 5 to 2 percent. Therefore, if we begin to see the activity cycle start moving and existing inventory, for example in the real estate residential sector starts getting absorbed, that’s when you will then have an opportunity for business and construction to begin. Finally, if there’s one thing each of us must focus on, what can we as a society, business and government from a policy point of view, do to increase the number of jobs and livelihoods in the economy.
The risk aversion is not a problem just from the lending point of view, the business borrower also is utilising limits less. So what we need is, as confidence is coming back, how do we get them to come out and say, it’s worth taking risks. And if you ask me, normally, the best time to invest and grow is at turning points. And I personally feel today that we are at one such turning point. I would have been a little more cautious in April-May-June, because we did not know which way this was going. But I feel more confident today than I did four to five months ago.
On whether the equity markets are out of sync with the economy
So, first, you know, I’m going back to Finance 101. The price of an asset is also linked to the holding cost of that asset. Therefore, if earlier, I was a saver and I was getting, say 7 per cent in a bank deposit, and I’m getting now four-and-a-half percent, my earnings ratio and my ability to take a higher risk goes up because I’m looking at a much lower alternative yield versus a equity or a risk asset. And therefore, the valuations adjust to the expectation of underlying interest rates at which you discount your future cash flows. So, there is a change in the fundamental discount rate at which you discount future cash flows. So, that is point number one. Point number two is, very often, we tend to look at the economy from a shorter-term lens and markets though they behave in the short run, are looking at discounting factors over time. And what is therefore happening is markets are valuing earnings of companies at a higher PE multiple than what they were earlier. And this PE (price-earnings) ratio is reflecting in marketplace valuations. However, I do believe that equity markets are reflecting more the reality of the organised sector, and many of the stressed sectors are not reflected in terms of their presence in the equity markets. Therefore, you’re seeing only one side of the economy getting a higher weightage in the markets. And the economy is larger, and the economy has pieces not reflected in market capitalisations of some of the listed companies, but they are outside that and that part of the economy may actually be having more pain than the markets part of the economy, which is reflected in valuations.
On rising stock market valuations
In India, if you take the risk-free race as safe, if I take our repo rate as 4 percent, which is what the RBI’s overnight rate is, if you look at the same rate in many parts of the world, it is zero. Yes, so obviously, the PE ratios can afford to be higher for the same currency kind of discounting. So interest rates globally are much lower and the amount of money which has been thrown in the economy is mind boggling. In 2008, Ben Bernanke talked about helicopter full of money. This time around, it is massive air cargo, multiple jets full of money which have been offloaded into the economy. And it’s that size of the money which is keeping interest rates short term close to zero, and investors are therefore going after assets, which are risk assets. So that is one of the reasons. Second is a belief that the world is changing, and that change has to reflect in the view that some companies will do better than the others. Now, it is obviously possible that the market may be overrating some companies and under valuing some others, but that’s how markets are, they correct and adjust over time, but as of today, very low interest rates, high liquidity and a fundamental belief that the world of the future is different, is changing the way people are looking at equities.
On resilience and sustainability as key for the future of business
My advice to all companies and business people is that wherever you get some good cash flow businesses, put it into businesses, which will be more sustainable over a period of time. One of the most important factors which I would advise savers and equity investors is that when you’re looking at your investments, look at two important criteria beyond current earnings or very glamorous picture, and that is resilience and sustainability of the underlying companies, the how resilient are they, how sustainable are they, how well they are changing the business models to the new world. Therefore, resilience and sustainability are key for the future of business.
On ensuring credit access
The issue is as long as the credit scores of the borrowers are reasonable, I think the good quality borrowers are getting money. It is only borrowers with lower scores who are finding it a challenge and that is something which we need to watch out for. And what has happened is that also there was very large proliferation in the financial sector, lots of players coming in, some people were more aggressive on risk, some people were more conservative, and when the tide turns, in the very famous Warren Buffet statement, those who are swimming naked are seen. So that is some of the challenges which we have faced in the financial sector, that if your risk management practices were not okay, if you were taking risks without proper assessment and underwriting quality, those people have got some of the challenges on the hand, but the broader financial sector is in reasonable shape and is in a position to serve the economy, especially for segments which have got reasonable credit quality. The issue is many borrowers, either because of the livelihood in the small business or in their jobs may have a stress, and we need policy and business to work together to support these people in the stress speeds. My recommendation to the government is we must go out and ensure that borrowers or people who have say, for example, had monthly income at Rs 25,000 or less, those are the segments which we really need to go out and give the stress-supports.
On whether the NPA crisis is well behind us
No, I think the broader financial sector seems to be okay but there will be pockets who have not managed risk well, and which will come out and play out over time.
On whether banks are likely to be flooded with NPS again
There are two conflicting emotions or behaviours, one is need for hope and the second is the need for discipline. In the Covid period, we certainly need to ensure that the businesses that are on the edge because they are impacted by Covid, get a chance to live for a while and hope that the Covid pain goes behind that. So there is a need for giving that bridge which enables businesses who would otherwise have died so that should things get better on the Covid front in the next three months, six months, nine months, one year, we’ve given these businesses a chance to survive. And that is what I call emotion and the need for keeping hope alive. On the other hand, we as banks manage depositors’ money. We have got to take care of ensuring that moratoriums, as we give to the borrowers, we don’t have players who say moratoriums for depositors. That’s not what we want. So, we need to ensure that there is discipline, also at the same time, while we work on the hope side. There are two balls we are juggling — hope and discipline at the same time. Too much of one can lead to indiscipline, but too much of discipline can wither away hope. And getting that, navigating that track and deftly is what banks and financial institutions are doing and it is here I must compliment the RBI for the way it handled the policy in the post-Covid era.
On the consolidation of public sector banks
My view is we need four to five strong public sector banks. And we need a strong and healthy private sector. If you look at the history, there was a time when public sector banking was 90 percent plus of the Indian banking, it’s now about 65 percent. And my personal view is over time, if we get to a balance, which is around the 50-50, that’s not a bad place to be.
On private sector banks consolidation
Consolidation is always an option. And I think it depends on the situation. And over time, I do believe that few players will be getting to be significant players. And if you look at the position worldwide, globally, there are five, six, seven or eight banks in most countries, who are the larger banks, and then you have a whole host of smaller banks. I think India will go on similar lines over time.
On raising capital
You know, we went and raised capital in the month of May in the markets, in the peak of the Covid period. We were delighted that investors gave us capital. And we did make a statement in our offer document, that the purpose of raising capital is threefold — number one, to strengthen our balance sheet, number two, to go for organic growth. And number three, to be open for inorganic growth. So that’s exactly how we are thinking about our business to keep on having a strong balance sheet, keep on growing organically, and always be on the lookout for appropriate inorganic growth.
On how technology will drive business
I am clear, the future of financial services is a merger with technology. And it’s going to be a massive reorientation of the minds of all of us. Historically, we’ve always believed that we have got to think about business, and technology has to be an enabler. I think the world is changing to a point where technology will drive business. In banking, keeping this broad technology as the core of how the business will be driven, there are three important aspects which are crucial for the future. First is the human quality of what I call prudence. Banks should be prudent, they should not be too excessively risk-taking. Second is what I call simplicity, that is make life simple for the customer, and build your business model and products in a simple manner which customers understand. And third, and the most important quality is the quality of humility. Many times bankers believe they are the masters of the universe. It is arrogance. What matters for banking is three human qualities — prudence, simplicity and humility. And if we can get that and combine it with a massive focus on customer and risk management, it is a winning model forever.
On technology manpower
It will be an exponential part of our future. And the question is, how much of the technology manpower we have in-house and how much we partner with the outstanding technology companies. Very often, banks think more about business than about technology. In many parts of our future, we will need to first think about technology, and then how it applies to our business. And therefore an outside-in view is also important. Having techies internally is good, but having the ability to get the best techies in the world and mindsets which are different is crucial.
On the government’s response to Covid
When I’m looking at the Covid era, I look at this in three worlds. I call it BC, DC and AC. So BC is Before Covid, DC is During Covid, which is where we are now, and AC is After Covid. I don’t know when AC comes. I do believe that in the DC world, the government has moved as things have developed. First, it was important to get people aware of the fact and therefore get a lockdown. I think it was necessary at that point of time, because we were walking completely in the dark. A lockdown would have been necessary, especially in the early stages. We have then shifted out. If you look at it holistically, I do believe the government has been proactive. If there’s one area where I believe we can do better, it is a very important need for improved collaboration with reference to Covid and other aspects of the economy, between the Centre and state governments. Health is a state subject, but I do believe that India’s economy is a subject which is both for the states and the Centre. And the states cannot take a view that the GDP is the Centre’s problem, my problem is only health. This collaboration between Centre and states is a crucial part, which can certainly get better in the days ahead.
I think agriculture and labour are two big ones. I think what is in the pipeline, which has been announced, but we would love to see the execution is privatisation. I understand all the challenges, we have challenges with Air India, we have challenges with BPCL. If we get progress on some of these areas where actually deals get done, that will be a very big confidence booster for the economy.
On execution being one of the biggest challenges in India
You know, I’ve had experience recently, in the last couple of years, in IL&FS, and the process of resolution in this country. One of the biggest challenges in India is execution. And this is not just for the last three, four or five years, this is for a very long time. In India, we need to improve what I have called ROTI — Return On Time Invested. I’ve seen this in the last 30-40 years, India must respect ROTI more, because time is of essence, and therefore, execution is key. Many of us have very good ideas. The challenge is what we need today are not advisors, but people who can support execution. If India and Indians can get better at execution in general, and start getting better ROTI, we would have made great progress.
On why Corporate India doesn’t speak up
First of all, we are really delighted that we have truly independent media like The Indian Express. So you do speak your mind, and we respect The Indian Express for that. And my sense is that in India, it’s not just about the message or the content of the message, it is about how it is positioned. And my experience is that the government is open to listening as long as the message is given in an appropriate manner, in the sense that it is not with an agenda and it is not for vested interests. If you give a message about what you believe, in a manner which is appropriate, that is, it is not poking anybody in any particular manner and it is without an agenda, I think it is possible to give the message. And I don’t think that is something which is an issue. Governments tend to be sensitive and often believe that the message has an agenda behind it. If the message is given appropriately, and without vested interests, I don’t see an issue.
On politics taking us West, economy East
There is a very interesting dichotomy which we are living through — politics and economics. Politics of today or the global geopolitics of today is making us go westward. The economics of the post-Covid world are demonstrating much faster growth in the East. So, we are actually in the middle of a dichotomy. Politics takes us West, the geopolitics, economics, trade and opportunity are much more in the East. And it’s not just China. It is China and the entire eastern region to the east of India, which is growing at a much faster rate. If you even look at Covid, East Asia, Southeast Asia and North Asia, in general, have handled it better than the West. So it’s a very strange dichotomy. One of the important issues for us is that we must be able to marry geopolitics with economic realities. And that is the navigation which we as a country and policymakers will have to find the answers to.
On trade with China
In the last few months, India’s trade with China has gone up on both sides. And the numbers are actually speaking. India’s trade with China has gone up in the last few months and India’s exports have gone up to China. One of the major reasons why the Indian steel industry is doing better is because they’ve been able to export freely to China.
On the next generation of business leaders
When I talk to both my boys — Jai and Dhaval — the standard response to me is that, ‘Pops, you don’t get it. The world has changed. Our context about how we maintain our relationships is different from your time’. If you look at our generation, we grew up at a time when there was no television, so the advent of television was a big thing. Then you saw the advent of computers in terms of emails, you saw a mobile, voice only. We started with a world where we used to pay 60 or 70 rupees a minute for voice mobile to where we are now. Our generation has seen a huge amount of change in our journey. And we therefore also need to keep in mind the new context. Yes, relationships are important and I’m a deep believer in that. I am a believer that when you build relationships, try to not build them for matlab (motive) but for their strength over a long period of time, because what you savour at the end of the day are relationships. But along with that, the context of change — your generation maintains relationships differently. It is Facebook, it is Instagram, you find a different way of handling those relationships and it is different, but that doesn’t mean it is not contextual. I think the meeting ground is give some, take some. There are some things we get right, so at least try and follow a little bit of that. And there are so many things, your generation gets it right. We’ve got to change. But keep in mind that change is more difficult for us as we get older. Change is easier for you as you are younger. It is a give-and-take between two generations or two separate perspectives. But all of us in our generation are getting much more technology savvy. For you, you live with it.
Stay back in the West or return to India: his advice to the youth
I’ll share with you my own life. When I was in college, we were four-five friends. Two of them went to the US. One of them became a very successful lawyer and the other one became a leading person in a large financial institution. Both of them are success stories in the US. When they were going, I used to ask them, why are you going? And their view was, for their context, the ease of opportunity in the US was much better. The starting point in the US was far superior for them than the starting point here. So as a pure risk-adjusted matrix, they took a call that this is a safer bet. And once you get into that system, you just get more and more enthralled with it. And the way of life, the way it is there that you find it difficult to come back. And many times I’ve had discussions with them (that) why don’t you come back and they ‘no, we are settled now and we have our families, everything else’ and they have remained there. For some of us, I think it was the classic Robert Frost road less travelled. It was not fashionable to be in India in the 70s and early 80s when I was growing up. It was not fashionable, if you were really a smart professional, you would want to be overseas. I was a product of a joint family. I was born in a family with 60 people — one kitchen and great family culture values. And the advice of my father and my grandfather was that, ‘Son, opportunity is there and beckoning, even if it is tougher, go with your passion and purpose. Don’t chase short-term, quick returns’. Ultimately, it was that entrepreneurial spirit which I would strongly encourage the young generation to try. The road in India is a tougher road, less-travelled. The road overseas is very often the easier road. But like George Bernard Shaw said, a reasonable man adapts himself to the world, the unreasonable man expects the world to change for him. Success depends on the unreasonable man. And my advice to the younger generation is, take the road less travelled.
Questions and Answers
Niranjan Hiranandani, Co-founder and Managing Director, Hiranandani Group
What is your view on the infrastructure and real estate sector? My second question to you is, if the vaccine which is coming, hopefully, comes in December, can we get back to the five per cent growth and what will we need in order to get it back to five per cent?
Uday Kotak: For the question on the real estate sector, the best guy is you. Here is my view on the real estate sector. I think I am more optimistic about residential real estate compared to commercial real estate because I think there is a fundamental change in behaviour which is happening. COVID has made most of us feel that home is a very important place. I hear about a number of people who are staying in a one-bedroom home saying, listen, I want to move to a two-bedroom, or people who are in a two-bedroom house saying I want to move into a three-bedroom; people are therefore saying that home is becoming a far more important part of my ecosystem. As for infrastructure, the government has taken note of the fact that it pays people in the infrastructure sector on time. Therefore, the payment of dues to small, medium and large businesses on time is an extremely important part for building the infrastructure businesses of our country.
Swati Piramal, Vice Chairperson, Piramal Group
COVID-19 has been an unprecedented crisis, morally, health-wise and economically. But I think it has been a failure of management globally. Managing policy, managing inequity, managing really just being muddled up in thinking straight. That’s why so many mistakes, so many people have died globally. What is your view? What could they have done better as global leaders?
I think many parts of the world were in a state of denial, particularly, say the United States, and that was a problem. I know I’m commenting very close to an election there. But the fact of the matter is, you don’t solve a problem if you’re in denial. And I just want to share something with you, Swati, about something which you must be aware of, because you are the expert in the sector. If you look at the healthcare spends of the developed world, the US spends 10 percent of its GDP on health care, Germany spends 14 percent of its GDP on healthcare, India spends 1.3 percent of its GDP in healthcare. Take the developed world, where they’re spending so much on health care. Despite that, the outcomes are very disappointing. It tells you something that they could have got it much better. And they lowered the guard too early. That declared victory also too early. Europe had a problem in April and May and declared victory.
On the other hand, in the Indian situation, my personal view is that India needs to double its healthcare spend over the next three years. The question that inevitably comes in, where will the money come from? I think one of the most important things which we as a country and the government and the policymakers need to sit together and think, is innovative ways by which we can raise resources for funding something which is crucial for us and for India’s future. When I think about where we need to strategically spend our money, healthcare is at the top of my list. Healthcare, defence, infrastructure, education and sustainability — these are the five areas where India has to find the money and spend medium-term for building a better India.
Ajit Gulabchand, Chairman and Managing Director, Hindustan Construction Company Ltd
Lots of things were going wrong in India for a long time. Then we corrected ourselves and started getting a great desire for doing it. Now, there’s a certain voracity in the way we look at things. There’s a fear in doing things, in the sense that risk averse. This has happened before COVID. But COVID is another unfortunate thing that has hurt us even more. But even before that, we were sliding. What would be the three things that you recommend, if you were the finance minister or the chairman of the economic advisory committee of the Prime Minister? Because in India, the government has a huge responsibility, not only does it have the policies that excite people, but they also come in the way of doing things. What would you recommend would create a different atmosphere in India, where the joy of doing business and joy of investment will come back?
Let me first say that India has a great ability to disappoint both the optimists and the pessimists. Therefore, having said that, if there’s anything which humanity lives for in the future, it is hope. I would strongly advise all of us not to give up hope, just when things have become tough. That is one broad general philosophy that I believe in. Now, if we think about India at this stage in terms of what is important for us today, and these are obviously changing times, and you have got to take the view of both short term and the medium term. In the short term, I believe we must think of people who have been hurt because of COVID in terms of their livelihood, we have to find ways of getting resources and give them a chance to live and survive. I think that should be our number one priority. Number two, for businesses which have been affected by the stress of COVID, we must be able to create that bridge, which gives them the ability to have a chance in the future. That would be my immediate response to these two points. And the third, for me, is the medium term, we must always make a distinction between what is urgent and what is important. I think what is important is what I said — we must spend on healthcare, infrastructure, education, sustainability and defence. If you look at our defence spend, compared to some of our neighbours, we are spending much less. We have to find the money. In the medium term, we must find money for the state, for the people, and get capital in this highly liquid pretty easy money world and fund these five areas over the next three to five years relentlessly in our pursuit for becoming a much superior country. We should put money in these five areas, while we take care of hope and aspiration in the short run, that’s what I think we need to do at this point of time.
Kailash Kulkarni, CEO, L&T Investment Management Ltd
You mentioned a couple of very good reforms in terms of labour and farm reforms as well as MSME reforms. How critical would be the state’s role in ensuring that these reforms get implemented well? Or is it clear that the Centre can play a very large role in ensuring the smooth way these get implemented because differing ideologies actually tend to clash? There’s a lot of noise around this, so could you throw some light on that?
This is a very important question today — the Centre-state relationship, which is at the forefront of India’s destiny. It’s very important that states and the Centre handle this very thin veneer of this relationship well. We must not allow the Centre-state balance and equilibrium to get fractured for our future, because there is a great interdependence both ways. I would, therefore, request all the states to show maturity beyond political objectives. And the same, obviously, to the Centre to really build a single India. The Centre-state relationship is at the core of India’s future.
Ashok Khemka, Principal Secretary, Government of Haryana
Your talk was very lucid, simple and easy to comprehend. My question is why do industry titans not join hands with the government and regulators to stop corporate scams, which are so endemic now and which manifest as banking defaults in repayments of corporate deposits to senior citizens and people who have put in their fate in such corporates?
You’re asking a very good question, and I do understand the challenges which savers, investors and depositors have faced with some of the banks, some of the NBFCs, some of the housing finance companies, and some of the cooperative banks as well. So, I understand the challenges which have been faced. My view is that there are really two aspects which drive behaviour. One is rules and the supervision of rules. And the second is a deep cultural change in the DNA of people of this country. And I would think we need both. One of the challenges for a long period of time, is this word called jugaad, which we’ve all heard in our country. Jugaad in the positive sense is welcome. But jugaad also means, let’s fit this and fix this. I think the mindset is much more societal and cultural. And that change, I think, is happening as we talk. We, therefore, have to be a part and instrument of that change. I don’t think change happens on an island. Change happens when society believes we need change. We are in the middle of one of those phases. But, you know, change comes with a lot of pain, it’s not easy. We need to ensure that we handle that pain along the way as well, and not get scared in the middle when the pain is high.
Mudit Jain, Managing Director, DCW Limited
Why doesn’t the government put power into people’s hands? They can do that by sharply reducing the indirect taxes — taxes on petrol is 250 per cent — so that more money is in the hands of people, which will lead to the greater velocity of circulation of money, leading to greater consumption and then stimulating the economy. Japan also co-opted business by forming MITI (Ministry of International Trade and Industry) after World War Two. And then you saw spectacular results in Japan. Sadly, why is the government not co-opting business in implementing the economic plans?
This is again deeply psychological and I don’t want to spend disproportionate time on the psychology part. India is a very paternalistic society. The first expectation of every average Indian is that ‘sarkar ne mere liye kya kiya’. This is a society, which has, for a long time, been a bedrock of what I call as an entitlement. Therefore, what you’re suggesting is a very appropriate thing. How do we move from being a society of entitlement to a society of empowerment? And the change for that is, of course, the nature of how governments think, and the nature of what our people expect the governments to think. People will always say that if there is a problem, what has the sarkar done? If a particular bank’s governance is mad and depositors are at risk, if you had talked to some of those depositors in normal times, they would say, oh, but I’m getting two percentage points higher deposit rate. But how do we get a society, whether the depositors or investors, to understand that whatever decisions and judgments they take have a risk element to that, and the consequence of that risk is on them. If things go wrong, we should not be asking for bailouts from the government. So it is a two-way process. The society is paternalistic by nature and expects the government to be out there to support. I am not in any way defending the need for better regulation and supervision, but I’m on a point where entitlement expects when things go wrong, what does the sarkar do? What if you’re ready to say that we made a mistake in our judgment, and we are bearing the consequences of that, that could be a very important step to move towards a society of empowerment.
KK Rathi, Managing Director, Indianivesh Fund Managers Pvt Ltd
I think the changes in the implementation of GST and government’s rather adamancy or not making major changes in the rates or bringing down the number of rates or reducing the impact of GST, is becoming a big hurdle in turning around the economy. Don’t you think the government should look at GST afresh and try to make major changes so that it really becomes beneficial for the economy as it was intended originally?
I would love to say that, yes they must do everything on GST. But today they are not able to have enough fiscal resources. There is a challenge on debt to GDP, there is a challenge on funding states, you know that they have given guarantees to the states. Finally, the central government is going to borrow and give the state’s money for the next two or three years. At a time like this, to expect the government to give up whatever revenue sources that are there, it’s not an easy thing at this juncture.
Yoginder Alagh, Economist and former Union Minister
My first question has to do with stimulus. We’ve had to do a lot of defence spending, and that has perhaps helped us. But a lot of the financial help that we are giving, as you said, is basically a rollover of loans. In the short run, given the urgencies that you talked about, isn’t it useful for us to spend some more money on some of the nice things that you talked about, like rural-urban infrastructure and so on, rather than worrying too much in the short term about financial balancing? As you said, if people live, then there will be a day when we’ll be reformed. My second question has to do with agriculture. It’s the one sector that has been facing these problems well. The farm bills are in the right direction, but at a time where we have lockdowns for very valid reasons, isn’t it better to think of implementing them next year and getting somebody like Ramesh Chand to do a kind of road map as to how we bring that out? They are about trade and transport getting locked down in this period because of sudden very legitimate needs. I have one last question about capital account convertibility of the rupee. Now, the rupee is convertible for foreigners, we are sort of maintaining an impossible interest rate. So they keep sending us money. But for Indians, it is still not convertible. Do you have a kind of medium term strategy for building up a convertibility of the Indian rupee?
Coming to your specific point on stimulus, I think the issue we have to ask is, what is going to be a bigger problem for us? Is it going to be on the supply side or is it going to be on the demand side. I have been talking to, for example, some of the auto companies right now, and they’re saying that they’re getting enough demand for the cars. But the big bottleneck is supply — the supply chain bottlenecks and inability to get some of parts — that come are from international suppliers as well as domestic — lockdowns, containment zones and others. So, if we gave too much of a demand stimulus and did not have enough supply, I think we will have a problem. We need to keep that physical issue in mind that supply is a constraint. The view that we spend more on the supply side is going to create some fundamental development, sustainable structure rather than giving a stimulus on the demand side, which could be more from the point of view of a steroid. Now if you give a steroid, give it in small doses but focus more of your fiscal issue on the supply side. The same thing, I think, will apply for agriculture.
On your question on capital account convertibility, I think India is in a very good position. I think for the answer to capital account convertibility, there are two important points. First is do we think that the price of oil will be low for long? If we believe that, then it is easier for us to plan for capital account convertibility because India is disproportionately dependent on oil even now. The second big one is Indian savers over the years have disproportionately exported our savings into gold. If India has to get to capital account convertibility, we must have an ability to have a gold monetisation or a liquid rolling or moving of gold within the country. Indians must be among the highest owners of gold in the world and that is a capital account convertible item. How can we innovatively get a solution for gold and oil remaining low are crucial for India’s future.
R Venkataraman, Dean, ICFAI Business School, Gurgaon
In hindsight, if the Yes Bank bank model of restructuring had been adopted for India’s largest private sector infrastructure lender, IL&FS, both that company and the creditors would have been saved. What’s your view on that? Number two, was the asset liability mismatch the main reason for the problems of IL&FS or the unproven allegations against the senior management? What’s your view on that?
On the point of IL&FS and the Yes Bank model, here is what I want to say. In the case of IL & FS, there were many large shareholders from India — LIC and State Bank of India. Before the government put in the new board, the government had a choice. I’m sure they would have talked with LIC and SBI, but they took a view that they are not going to put in new risk capital or equity capital out of policyholders money or depositors money of State Bank of India. Therefore, the decision of the government, unlike in the case of Yes Bank, was not to put in more good capital behind IL&FS and that is a fundamental difference. Yes Bank has survived because a huge amount of money has been put in as equity capital by various financial institutions, and in particular, State Bank of India. Therefore, the choice was taken by the government and I’m sure it must be in coordination with regulators and banks, not to put equity capital of either State Bank of India or LIC into IL&FS and that is a very material difference. On the second point, I think the fact of the matter is that after all our efforts, we are giving an indication of recovery which is somewhere between 50 and 60 per cent of original loans given by creditors. So, if it was only an asset liability mismatch, you would not have a hole between the total amount of loans due to creditors versus what we think is recoverable. Yes, there is a going concern argument which you may use, but today there is a gaping hole between recovery and creditors’ money.
Bharat Joshi, CEO, J Curve Ventures
Uday Kotak, MD & CEO, Kotak Mahindra Bank
On the liberal ECB, I just wanted to say that for any borrower who wants to borrow in foreign currency, there is enough liquidity available in US dollars with banks from whom you can borrow US dollars as long as you’ve got genuine use and purpose for it. Therefore, I don’t think there is any issue about foreign currency borrowings for most borrowers in the country. Keep in mind that when you’re looking at lower interest rates on the dollar or any other foreign currency, there is a forward premium as well. So when you look at your total cost, it is the cost of interest in dollars, plus the forward premium cost. Do not just look at interest rate costs, because otherwise you could take foreign currency, exposure for domestic and you could have a mismatch in the future.
Vidyanand Jha, Professor, IIM Kolkata
How do you see the relationship between business and government going in this phase?
I can share this in my hat as President, CII. The day before I took charge, we had a CII meeting with Prime Minister Modi. One of the most important points he made at that conference, which was in early June, is that he looks at business and government working hand in hand. There is a kind of message which has come from the Prime Minister to CII, and therefore, I do believe that as long as business plays it straight, as long as there is no agenda beyond what is right for India and the Indian economy, I think there is an opportunity for business and government to work closer together.
Arvind Sahay, Professor, IIM, Ahmedabad
One of the points that you made consistently throughout your observations was the issue of balance. You mentioned that you have to balance between hope and discipline as far as maintaining the integrity of the financial system is concerned. My question is about the financial system. The financial system in India and globally is kind of a tightrope walk. Some factors tend to stabilise the system and some factors tend to destabilise the system. I was looking for your views on what you think are the top three, given the current state of the Indian financial system and perhaps globally as well, that lead to stability in the Indian financial system? And which are the three factors which tend to destabilise? And how are they interacting with one another in the near term?
It’s a very important question as to what keeps the global financial system stable. First of all, with such low interest rates for long, let me tell you one thing, globally, banking models come under huge stress at very low interest rates for long because you have branch infrastructure, network infrastructure, people, cost of servicing. If on the deposits, you’re not paying your customers, but you’re not making any returns on the rate at which you’re borrowing — taking deposits versus the branch network — the cost of lower interest rates for banking system globally is actually a big challenge. So that is point number one from the point of view of stability. A second important point is technology and change around technology. Every day, when I go to sleep, I worry about whether I will have a bank next morning. And for two reasons. Number one, will there be a Google bank or an Alibaba bank which will take me out of business? With some technology change, which will make it uncompetitive for me as a banker. And the second one is safety of my customers’ money. Will we wake up next morning and find that somebody has stolen our customers’ money? These two points keep me sweating almost every single day and, therefore, we are constantly making change. If there is one thing I want to say for keeping the financial system stable, it is to ensure that practitioners like me are continuing to be paranoid. That is the key for our future.
Shweta Rajpal Kohli, Director, Public Policy, Sequoia Capital India
A very brief question on something that you mentioned around technology and the future of FinTech in India. I lead public policy for Sequoia Capital India, and a large part of our portfolio is actually the FinTech portfolio that has been doing remarkable work during the time of COVID, especially in digitising the MSME space. If you could share your thoughts around where FinTech is headed and the regulatory changes that may be needed to further accelerate this trend.
I think financial technology or FinTech as you call it is going to be one of the big instruments of change in the Indian financial sector. What I just want to highlight is that some of the nuances between how a FinTech thinks and how a bank thinks — there are many pluses about how FinTech thinks versus a bank, which I’m aware of, which is a technology first, customer convenience and solution about everything else, speed of execution — these are very big pluses for FinTech. On all these counts, banks, in general, are behind the curve. However, there are two or three points which I wanted to highlight. Along with the change in technology, we are finding risk management dramatically go up. The level of frauds in the system have grown exponentially. It’s a very delicate balance between customer convenience and security. The younger customer, in general, has not seen what it means when he or she loses money. On the other hand, bankers tend to be excessively cautious about controls, therefore, for me, the future of FinTech is ideally a much deeper collaboration between banks and FinTechs. Banks don’t get it right easily, but Fintechs and banks together are what I think is the future for developing a strong financial sector.
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