Do you share the general exuberance in industry about the new government?
I do not think the exuberance is irrational. The quarterly growth rate is higher, inflation is relatively low, commodity prices are falling, oil prices are the lowest in five years, the current account deficit level is comfortable, gold imports have come down and diesel subsidy has almost vanished.
We are waiting for the government to say diesel prices will be market-determined. We, in fact, expect diesel prices to come down after the state elections.
Do you see any dark spots?
Uncertainty hurts and, therefore, should go. It is time the government started taking decisions. For instance, coal. No one knows what is going to happen (after the court decision on deallocation of mines). Coal India is making statements that it does not want to take those mines because it does not have staff to manage those. It does not have a chairman for a long time. These are not “big-bang reforms”.
Also, a decision on gas pricing has been postponed twice already. This means fertiliser and power plants do not get gas. How can you run a country like this? You have to move on. Take a decision, whatever it is. Look at BSNL, which is another Air India in the making. BSNL has accumulated losses of Rs 22,000 crore (Rs 220 billion). MTNL is also suffering losses, though private telecom companies are making money. How long will government funds be used to pay the monthly salaries of Air India employees? These are decisions that need to be taken.
What is your take on the ‘Make in India’ programme?
‘Make in India’ is a good idea, as it is aimed at boosting manufacturing. But it will remain on paper if you continue to have difficulty in getting land and labour. We need to liberalise land acquisition and labour laws. The prime minister is saying everywhere that he will make doing business easy. The ease of doing businesses involves infrastructure, land and labour. The PM is also talking about single-window clearance for projects; all these ideas need to be implemented now.
When are you expecting big-bang reforms to come?
Big bang reforms are complex. Like labour law reforms and the Goods & Services Tax, which are still being opposed by a few Bharatiya Janata Party-run states. It is a big task for the finance minister because he has to implement GST by 2015.
Let us focus on decisions. For example, the Budget says we will get Rs 58,000 crore (Rs 580 billion) from disinvestments. But we have hardly got any so far. If you wait for the last day, it is not going to work. You cannot bunch Rs 50,000 crore (Rs 500 billion) in two months. You do not need any reforms for these things; it all boils down to decisions.
Do you still believe housing prices in India are inflated? There has been some correction of late.
Inflated means that you have to see the real estate price and compare it with the salaries of people, and affordability. Can the citizens of Mumbai aspire to own a property in the city? It is impossible. That is why I said housing prices were still inflated. It is because of land prices. If you make a building in South Mumbai today, 90 per cent of the cost would be for land. So, land policies are faulty. You have to release more land.
Our politicians should have the will. For example, even if you own land and want to build a house on it, it will take you two years to get the approvals. And, you have to go to 40 different agencies for approval. If your plans are within the norms, you should get it in two months. There is too much of corruption or speed money.
The rupee has stabilised, though it has weakened a little lately. I think money is still coming, despite some profit-booking. There has been a bit of a slowdown in inflows from foreign institutional investors. But I am sure if we announce some big reforms, inflows will come. Remember, India is a large market and has a large capacity to absorb. Look at Indonesia, Thailand or the Philippines; what is their absorption capacity for FII money?
You have always been the government’s go-to man. Are you open to working for the present government in some capacity? Have you been approached?
My weakness is that I cannot say no. That is why I got roped into so many committees. I do not think the new government has set up many committees to date. As for your second question, I have not been approached by the new government.
Regarding consumer demand, industry players say the vibes are good but things are not going to improve in the next two to three quarters. What is your view?
I disagree with that. What consumers are looking for are good deals. Why has e-commerce become such a success? If consumers are going to websites to buy, the key is logistics. We do not have enough people to deliver it.
We expect automobile sales to be in double digits in the next three months. Consumer credit penetration in India is very low. Outstanding housing loan as a percentage of gross domestic product is only nine per cent, compared with two per cent 35 years ago. This ratio in our neighbouring countries is in the 30s and 40s. So, this growth is going to be phenomenal. And, with a stress on financial inclusion, accessibility of people to banks will only increase.
On a year-on-year basis, credit growth has so far been below 10 per cent, the lowest since 2001. When do you expect bank loans to pick up?
The poor credit growth is a result of the previous period. Last financial year (2013-14) was the worst year. So the credit growth cannot happen. I am expecting it to pick up significantly, to 16-17 per cent like earlier, in the next financial year.
Deposit growth has also been on the lower side. Earlier, we had 17-18 per cent deposit growth. But that has come down due to inflation. It is because food cost, transport cost, etc, have gone up. As a result, people are spending more; savings’ share in GDP has fallen from 34 per cent in 2000 to 31 per cent now.
Consumer credit is going to rise. All stalled projects will require money. If they get permissions, there will be demand for credit. In many stalled projects, banks did not release the sanctioned amount because the projects got stuck for various reasons, such as input linkage. Capacity is increasing in every sector.
High interest rates, too, are hurting loan demand. When do you see the central bank beginning to lower policy rates?
There may be a marginal rate cut in 2015. You cannot expect sharp cuts, as inflation is still a major concern. No doubt that inflation has come down, but it is still beyond the Reserve Bank of India’s (RBI’s) comfort zone. In any case, a change of half a percentage point in interest rates is not going to improve industrial production. The fall in inflation has to be sustainable for lowering rates.
RBI has given only two new bank licences and settled for differentiated licences. What is your view on this? Should business houses be allowed in banking?
Small banks and payment banks will certainly be helpful in extending financial inclusion. I personally feel RBI took the right view in not giving bank licences to industrial houses in the previous round of licensing process. There is the issue of conflict of interest. In addition, if a business conglomerate that produces, say, steel, and also does banking, no other steel producer will go to it for loans. Why should a competitor want to present its business model to a rival?
In India, banking is very fragmented. Is there a case for consolidation?
We have a large number of small banks. What we need is a small number of large banks. If you see the top 10 global banks in terms of market capitalisation, you will have a Russian Bank, a Chinese Bank and a Brazilian Bank. An Indian bank will come at, perhaps, number 200. There is a clear case for consolidation. But I must say it has its own problems. One idea of consolidation is more efficiency and better cost control. But we cannot afford to reduce manpower, as we are not a developed economy and do not have a social security.
We need to have larger banks, as Indian industry has grown faster than the banking industry. Quite a few banks have exhausted their group exposure limits to large companies because banks are allowed to lend only a certain percentage of their net worth. The large Indian companies have to go outside to use big banks’ balance sheets.
Do you think the relaxation in reserve requirements for financing infrastructure and housing pave the way for a merger between HDFC and HDFC Bank?
It certainly helps. But, on the other hand, availability of seven-year money is limited in India. Large long-term bond markets are not there. How many people are interested in investing for seven years? Insurance companies look for long-term assets. But Indian insurance firms are not that big yet. Life Insurance Corporation (LIC) has compulsions to invest more in government securities. And, that is one of the reasons why private-sector bond market has not been created.
Do you think there is still some pain left in commercial real estate?
A lot of commercial real estate is still vacant. Rates have come down significantly and will go down further because there is a lot of surplus. On the residential side, developers are not willing to bring prices down. So, there has not been any significant correction. Buyers were not buying last year; everyone was sitting on the fence and expecting prices to come down. Many builders put a clause that if we sell in future at a lower price, we will make it applicable to you. So, it is unlikely that residential real estate prices will come down sharply, that is by 10-20 per cent.
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