India needs a tighter fiscal policy and loose monetary policy like the rest of the world. Uday Kotak, executive vice chairman and MD of Kotak Mahindra Bank believes that the government needs to impose duty on gold to curb a strong demand for the yellow metal. He said that savings are moving into unproductive assets like gold and it is hurting the Indian economy. He spoke to NDTV Profit on the sideline of the World Economic Forum in Davos.
Here are excerpts from the interview:
- We spoke to you at the start of the year and you were keeping a very close eye on Europe. Today, what is your view on Europe what have you picked up?
- I think the euro zone is a muddle. But my view is little less pessimistic after coming here than what it was before. I just feel that European leaders will manage the muddle without any disruptive crisis.
- But there are various scenarios been talked about the most immediate. One is to say that Greece is been forced into default and perhaps an exit from EU. I am wondering if this has any potential to disrupt global markets?
- I think even if there is a Greece default of sorts, they will manage an orderly default. I do not think it is going to be disorderly and that is what the leadership in Europe is focussed on. They will make sure this muddle happens. I think structural issues still remain and Germany is playing a wonderful game between wanting to make sure that different countries in the euro zone reformed there fiscal situations at the same time will not let the euro collapse.
- But even if that happens, what is the best case scenario if you want to be optimistic? The worst case scenario is hardly any negative growth in Europe and moderate growth in US from a global economy stand point.
- I think the euro zone growth will be below 1 per cent. The US growth would be somewhere between two to three per cent for 2012 and in many ways India at around 7% does not look bad at all.
- Only in comparison though..
- Of course. But it is all relative ultimately. We need to fix the supply side if we aspire for much higher growth in the context of a pretty slow world.
- What is the view picking up here? In India, as you have said mood in particular, is fairly bad. The reality may not be but the mood is bad. Are international investors slightly sceptical now?
- First, I think as i said earlier, the mood is worse than the reality. The reality in India is quite good particularly other than leverage of top 25 corporates. The rest of India in terms of the real economy is quite okay. Yes, we are slowing down in growth. It is not as fizzy as it was but things are reasonable. We have seen the rupee has also come back on on opening the NRE deposits. It was a very good move and that has seen flows come in and foreigners want to see India address the supply side issues. But on a deep down basis, there is view that there is enough correction happened in 2011 both on the rupee-dollar as well as the equity markets. The end of 2011 was close to the bottom of the cycle. That is the feeling you are getting from the international investment community and on a fundamental basis India needs to address two things. First, India is very dependent on oil and we need oil sector reforms. This includes getting transmission of energy prices into the hands of the consumers. Keeping it away for so long is now really hurting the macro and the fiscal situation. The second one is the enormous Indian appetite for gold imports which are at $ 35- 40 billion dollars in a year.
I am of the view that the government should be bold enough to increase duty on gold up to 5 per cent to 6 per cent. This is because i do not think the smugglers model works at that level. As long as gold does not come through informal channels, the government must collect duty on gold more aggressively. This is in addition to the fact that it is hurting the current account and it is also putting our savings into a unproductive asset. So money instead of going into financial savings is going into gold we need to correct this very fundamentally and structurally. The third is the investment cycle. This is because India’s issue is supply side and execution in the infrastructure space is the biggest pain.
- If I actually pick up on that one, it is the toughest to address. The RBI has cut CRR and indicated that they are moving on a downward trajectory but they have also said in their statement very clearly that it is not all that it takes to revive investments.
- Absolutely. We need to have a tighter fiscal policy and a looser monetary policy like the rest of the world.
- But will you advocate steeper downward trajectory on rates in India?
- I would love to see Indian policy rates come down by 100 to 150 basis points in this calendar year. This means by December 2012, I would like to see repo rate at below 7.5 per cent.
- Would you then see the banking system rates come down steeply as well?
- If policy rates drop by 1 per cent or 100 basis points then credit rates will drop probably by 0.5 per cent or 50 basis points.
- I am wondering why there is a liquidity deficit and a structural deficit that we are facing right now? Is it because credit growth is not high yet there that we have a large deficit?
- First, a lot of offshore funding which was happening has reduced because global balance sheets are shrinking or corporate demand has moved into the rupee. Secondly, I think you have RBI releasing dollars into the system in fighting the battle against currency. So to that extent they have sucked out rupees. Third is that this is a busy season of the year. So when there is much greater need for credit and credit demand. Hence, the RBI step on CRR for Rs 30,000 crore to be released in the system. They need another one in March for another Rs 30,000 crore.
- Last question then. I cannot help asking for your view what this could mean going ahead for the indian equity markets?
- My personal view is BSE Sensex around around 15,000 and NSE Nifty around 4400-4500 is the floor. On the upper side, on fundamental valuation basis, above 18000 starts looking like a stretch.