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How India Can Escape The 5-6% Growth Trap: KKR’s Sanjay Nayar

KKR India CEO Sanjay Nayar said that fiscal management is the key to attaining growth.

A worker arranges a sheet of veneer at a plywood manufacturing workshop in Muzaffarpur, Bihar, India (Photographer: Prashanth Vishwanathan/Bloomberg)Q
A worker arranges a sheet of veneer at a plywood manufacturing workshop in Muzaffarpur, Bihar, India (Photographer: Prashanth Vishwanathan/Bloomberg)Q

India will remain stuck at a 5-6 percent growth rate unless the country undergoes structural reforms, Sanjay Nayar, chief executive officer of KKR India, told BloombergQuint in an interview.

“Where we are today is no better than where we were in the past. It is probably an opportunity lost because the last three-four years had fantastic tailwinds for commodity prices, oil prices,” Nayar said.

India’s gross domestic product will expand 6.8 percent in the year through March, the slowest pace in four years, according to the median estimate in a Bloomberg survey published late last month. The forecast was lowered from 7.3 percent predicted in August as Prime Minister Narendra Modi’s abrupt decision to ban high-value currency notes and uncertainty stemming from the introduction of the Goods and Services Tax disrupted business.

Nayar said tackling the fiscal deficit in a structural manner is a key reform initiative that is yet to be undertaken.

Here are the edited excerpts from the conversation:

What is your outlook for the economy given that there are so many conflicting voices?

Ever since I was in the banking sector, back in 2002, I have said that India is going to be stuck in a growth rate of 5-6 percent because government after government didn’t tackle structural reforms. Where we are today is no better than where we were in the past. It is probably an opportunity lost because the last 3-4 years had fantastic tailwinds for commodity prices, oil prices. We inherited a lot of problems that relate to bad assets in the banking system, which is a making of the past 7-8 years of bad project financing.

We will always be stuck in this range unless you make structural changes. We are, unfortunately, settling down at a low common multiple.

The other part is, this government has done good stuff. If you look at the conviction, the honesty to do things, the urgency to do it, the work ethics. As a means of formalising the economy or institutionalising it, demonetisation and GST are very well-meaning reforms. They are absolute music to the ears of foreign investors who are long-term investors like us. A more institutionalised economy is something we would love to have. So, steps of this nature help. But whether they are well-timed and well-executed are question marks.

Urban consumption is picking up a little bit, rural consumption is down, investment demand is down and consumption is balanced off, with urban going up and rural coming down. We are unfortunately prone to cyclical growth numbers and cyclical issues. Because of the supply constraint in the economy, each time consumption picks up, we have a spike in inflation and a hawkish central bank. We have to tackle structural issues to get to the next level of growth and break out of this.

India can be a picture of great economic stability at a low level of growth or we can break out of this 5-6 percent and get to 8.5-10 percent. That will not happen on its own. We have got to do things to make it done. India has a great opportunity. We have a government that is extremely well-meaning, hardworking and wants to get things done.

What is the government missing?

The point that everyone is missing for many years is that we must tackle the fiscal – the size of the fiscal deficit. We keep playing with numbers, people keep commenting on 3.5 percent, 3.7 percent, 3.2 percent when the fact of the matter is that the Indian government is a dis-saver and we have had a fiscal deficit for two decades. It takes away all the savings of the economy. Today, we borrow 95 percent of our fiscal from Indian savers.

The government is a dissaver and it borrows it from private savings, so there is nothing left for the real sector. That is the crux of the issue.

We can debate whether the real rates are high or low, equity markets are overvalued or undervalued. But the fact is the entire risk-free rate itself is corrupted by huge borrowings in the market.

The biggest structural reform which one can think of at this time is really tricky and complicated because we need to stimulate growth and cannot just cut the fiscal. That’s the tough situation. But each time, we had comfortable situations like easy commodity prices, good tax collections, we should have done this.

Tackling the fiscal in a structural way is the key issue here. We have to get measures to unlock negative public sectors. We have to make serious divestments and not one or two things here and there. We need to get investment spending and growth back on track so that revenue collections can go up. Tax administration and plugging tax holes has already happened.

We have to give the economy another two quarters to see the impact of the recent measures coming through.

It will work out for March numbers or next June numbers but we are not going to break out of the new growth rate. We will move to 5-6.5 percent rate all the time unless we make structural changes. The second big structural change has something to do with the banks. Either we can create a bad bank and take the bad assets off. China is doing its third bad asset management company. So, we tackle that head on. We have to get tough structural reforms . Land and labour were tried and not easy to get done but those are real issues that improve the productivity of the economy. Once we tackle the fiscal structurally, then we have real capital markets. They are intermediate savings to investment opportunities.

Structural change of the fiscal, tackling the bank problem and carrying out some tough reforms as they pertain to land and labour are the three things.

How many years have you been saying this for?

I have been saying this since 2004-05. We have to face the fact that the complexion of spending of fiscal has improved a lot more in this government. Minimum support price is not a giveaway, there has been a cut down on giving unnecessary subsidies, so the complexion of spending has changed. But I am not worried about that. We have to tackle the fiscal problem and we have to get out of the way of private savings. Today, governments at large preempt 95 percent. That’s the starting of the issue.