‘Macro India’ Is One Of The Best Places In The World, Says Uday Kotak
Demonetisation could help improve the tax-to-GDP ratio in the long run, said Uday Kotak
In the midst of uncertainty surrounding some of the world’s largest economies, including the U.S., India’s macroeconomic fundamentals remain stable, said Uday Kotak in an interview to BloombergQuint in Davos on the sidelines of the World Economic Forum. In the global scheme of things, demonetisation, which could lead to a near-term slowdown in growth in India, is not “as big as we think”, Kotak added.
Kotak believes that India continues to be a “bright star” and the economy’s macros remain strong.
On the economy, I think India still continues to be the bright star in the world. Not just because of our domestic GDP growth but also because of where the rest of the world is... As long as oil is below $65 per barrel, India is in good shape. A lot of the indicators - the current account, the fiscal deficit - show that India is in good shape. The rest of the world is talking about increasing rates, India is still bringing down rates. So we have monetary space and inflation is under control. So macro-India is probably one of the best places in the world.Uday Kotak, Executive Vice Chairman & Managing Director, Kotak Mahindra Bank
While acknowledging that there could be some near-term economic slowdown because of the government’s decision to withdraw Rs 500 and Rs 1,000 notes, Kotak said the demonetisation may eventually lead to better tax compliance and a higher tax-to-GDP ratio.
He added that if Rs 5-6 lakh crore in deposits get added to the banking system, the eventual multiplier impact of those deposits will be significant.
If the net currency out of circulation is Rs 5-6 lakh crore, I think as the multiplier effect comes into play, you should see 3-3.5 times of this net number in terms of savings created in the system. Then it will go across a range of products, not just bank deposits. So you will see a significant growth in formal financial savings.Uday Kotak, Executive Vice Chairman & Managing Director, Kotak Mahindra Bank
With the budget around the corner, Kotak said that the government needs to focus on job creation and added that some increase in capital expenditure may be justified. Kotak, however, believes that this must be balanced with fiscal consolidation and suggested that a fiscal deficit target lower than 3.5 percent of GDP would be soothing for the markets.
As per the current fiscal roadmap, the government is required to bring down the fiscal deficit to 3 percent by March 2018. However, a committee relooking at the fiscal targets is likely to set a range for the fiscal deficit, which may allow the government some wiggle room.
The estimate has been 3 percent of GDP by March 2018. Instead of 3 percent if we are at 3.2-3.3 percent, I don’t think its the end of the world. Psychologically, 3.4 percent is better than 3.5 percent but I don’t think its the end of the world. Ideally around 3.2-3.3 percent is a good place to be.Uday Kotak, Executive Vice Chairman & Managing Director, Kotak Mahindra Bank
Commenting on speculation that the government is considering the introduction of a Universal Basic Income scheme, Kotak said the issues of wealth creation and wealth distribution have to be carefully balanced.
“We have to keep in mind that the world needs to address both wealth creation and wealth distribution. We need to find an optimum equilibrium” said Kotak while adding that the danger for any society is to swing to one extreme. “On the distribution side, we have to be careful that we don’t keep distributing a smaller cake. But as the cake grows, you have to find a fair and equitable distribution methodology.”
Outlook For Interest Rates
With inflation under control, Kotak sees some scope for rate cuts and says that another 25-50 basis points in rate cuts from the RBI is possible. The RBI has cut rates by a total of 175 basis points since the start of 2015 and the benchmark policy rate now stands at 6.25 percent.
Economists are divided on whether the RBI will cut rates at its February monetary policy review. Since inflation is well below the 5 percent target for March 2017, some believe that the RBI still has room to cut rates.
If the RBI does cut rates, bond yields may ease further towards 6 percent, said Kotak while adding that the trajectory of global monetary policy and bond yields would also be a key factor in determining local interest rates.
My sense, after talking to people, is that there are two rate hikes in the U.S. this year. The U.S. 10-year will move to 2.75-2.80 percent by the end of this year. So if that is where the U.S. is, which is priced in, I think India has room for one or two rate cuts of 25 basis points each. That’s where I see the rates. That brings me to the view on the Indian 10-year (bond). I would say broadly in the range of 6- 6.5 / 6.6 percentUday Kotak, Executive Vice Chairman & Managing Director, Kotak Mahindra Bank
With inflation differentials between India and the U.S. narrowing, Kotak also expects the Indian currency to remain relatively stable. A 3-4 percent annual depreciation in the rupee would be a reasonable expectation, Kotak said.
Where Are The Markets Headed?
The direction of the equity markets may be tougher to predict. As always, the direction of global fund flows will have a bearing on the Indian markets.
However, Kotak feels that the surge in domestic inflows into mutual funds have helped the markets stabilise. “I am very enthused about domestic flows into mutual funds and insurance companies. The Indian mutual fund industry has come of age.”
My instinct tells me that we will see steady but modest returns in the market. But as inflation gets lower, investors have to look at real returns differently now. So if inflation is at 4-4.5 percent, then a 8-12 percent nominal return is not a bad return.Uday Kotak, Executive Vice Chairman & Managing Director, Kotak Mahindra Bank