Davos WEF 2018: Private Investment Will Return But In A Different Form, Says Uday Kotak

The economy is improving, and we can see it on ground. We can see a change of pulse in our loan growth. I believe that India will grow at 7 percent in 2018-19. I’m quite comfortable with the fact that the Indian economy is steadily recovering. It is reasonably sustainable as long as oil prices don’t go out of control. Thus India is in a sweet spot. If there is an area we need to focus on, it is on India’s competitiveness. We don’t need to be protectionist, but we must figure out how to be competitive. Even when oil was at $40 per barrel, we were running a current account deficit. This year we will be running a 2 percent current account deficit and I’m of the view that India has managed the debt side of financing this deficit very conservatively. But in the bargain, we have become excessively dependent on foreign investment to finance what is effectively a P&L item. We should be getting foreign investment from a position of strength and not of weakness. If you look at some of the major countries in the world, like China, Japan and Germany, they have emerged as global powers with very strong trade and commerce, and investment is pouring in because of that. The only exception to the rule has been the U.S., but then they have the reserve currency.

As demand goes up, it starts asking for capacity, which will inevitably lead to an investment cycle. The year 2018-19 will see a pickup in the investment cycle as people become clearer about the political outcome in 2019. In fact, both FY19 and FY20 will see a pickup in investment, as a lot of people are already doing brownfield. There is improvement in capacity utilisation and India is looking at a turnaround.

We will most likely see private capital in a different form. We will see a lot of it come in as institutional capital, including private equity and other sources of capital, not the traditional promoters’ capital in every case. There are a few strong promoters who will put money to work. Therefore, we will see a different mix of new investments in the next few years. The fundamental structural story is also changing in the private sector.

My sense is that the government will have the flexibility of public sector undertakings to ensure that the government’s fiscal deficit is under control. They will use the disinvestment tool appropriately to contain the fiscal deficit. I think there will be a little bit of a slippage, but not too much, say around 3.4 to 3.5 percent of GDP this year, but the government has significant ability in its underlying public-sector undertakings to keep the deficit under control even next year.

We are going to have to watch the inflation levels, which is why investment must start, because we will soon have issues on capacity. The investment cycle needs to pick up now to ensure that inflation remains under check.

I see the 10-year at around 7.25-7.5 percent for the next few months, but these are fast changing.

You have to watch for it, I think the RBI rate cycle is flat to up.

The opportunity is significant, and it is just beginning to unfold. You’ve got Rs 12 lakh crore size of business there, so you should pick and choose wisely. You have to take it step by step.

We’ve got many opportunities, between our bank, alternate assets business and investment in ARC. We’ve got a team looking at various opportunities.

It’s an observation about a policy framework in practice for the last 30-40 years. We’ve consistently had a weak current account that reflects poor competitiveness on trade by the country. There are two options to fill the current account - debt or equity. The policymakers, including the RBI have been conservative on taking debt to fund the current account, and in the bargain take foreign investment to fill the hole. I am open to welcoming foreign investment, but not from a position of weakness.

If a foreign bank wants to have a wholly owned subsidiary to do business in India, that’s fine. If you look at the Indian banking sector, there are public sector banks, which have challenges, and then you have the Indian private sector banks. I think we should stop calling them ‘Indian’ private sector banks, because not much is left...

It’s not a great idea.

Firstly, the Indian economy is structurally doing better, that should reflect in valuations. But post demonetisation and the Goods and Services Tax rollout, we are seeing first time savers in equity mutual funds and insurance policies like ULIPs. These first-time savers do not understand the underlying risks they are taking, and a lot of money is moving to financial savings like at the top of a funnel, from where it’s moving into a narrow pipe of a few hundred companies. So, it is bound to lead to some level of exuberance. Most of these savers have not seen the kind of volatility that we’ve lived through in our lives. We must be clear on what happens if some of this money goes into small and mid-cap companies where the governance may not be at the same levels. How do we respond from a policy point of view to ensure that we build something which nurtures these savers for the long haul to build a sustainable long-term capital market for India? Finally, for the first time we’re seeing the ability to create a strong capital market where both domestic and global players can play. And the concern is to nurture this.

I think it’s company specific, some of the large-cap companies may deserve revaluation. What we must be clear about is that cats and dogs also run, and it’s very difficult to define what’s a cat and a dog. I can’t define that for you. But we need to have a system where governance and fair play are in place. No more WhatsApp tips for people who don’t understand..things like that.

We have got to keep chugging away, because unless we do that, we will be running the risk of not creating an institutional framework for a long-term sustained capital market.