Apr 23, 2012 09:00 AM IST | Source: CNBC-TV18

Govt's 7-7.5% growth target over ambitious: Deepak Parekh

HDFC chairman Deepak Parekh told CNBC-TV18 that the RBI has swallowed a bitter pill despite no decline in inflation. He adds that he was not satisfied over the recent policy flip-flops by the government.

Deepak Parekh, one of India's most influential corporate leaders has lashed out at the policy flip-flops in India. The HDFC Chairman said that foreign investors are now shying away from India across sectors.

High current account deficit, slowdown in the economy, unclear tax provisions is making them apprehensive about India, he told in an interview to CNBC-TV18's Shereen Bhan.

"I was in Singapore with big investors, they said they would look at other countries and look at India when the environment was more conducive. But, at the moment there is to be no more investment in India."

Given these macro issues, he feels that government's target of achieving 7-7.5% growth this year is over ambitious.

Meanwhile, talking on Reserve Bank's move to cut policy rates by 50 basis point, Parekh said, "The RBI has swallowed the bitter pill despite no decline in inflation, but it’s about time that we give a little bit of growth to the economy. I'm not satisfied over the recent policy flip-flops by the government."

Below is an edited transcript of his interview with CNBC-TV18's Shereen Bhan. Also watch the accompanying videos.

Q: I have to ask you about what the Reserve Bank has done in its credit policy, it has surprised the market with that 50 basis point cut on the CRR any way post the macro economic review, the hopes of a further CRR cut was diminished – what are your thoughts on the credit policy?

A: It is time we need an impetus for growth. Growth has been badly impacted. The Reserve Bank has swallowed the bitter pill that although inflation has not come down to the level they would have liked and we would have liked, but it’s about time that we give a little bit of growth to the economy.

Q: Do you believe he is being forced into taking a more aggressive rate cut because expectation was 25bps. We heard the Finance Minister 30 minutes before the policy saying that you will hear about rate cut in the next 30 minutes. Do you believe he was badgered into a more aggressive unwinding?

A: He was badgered last time also, but he stood his ground. Some numbers that have come out are a little better than last time. So, there was some justification. He has taken a bold step rather than keep changing every two months and three months.

Q: But the comment that this now going to leave little headroom for further aggressive action, do you believe that this is perhaps it at least for the short term?

A: I think it’s perhaps it. Inflation is still not under control, food inflation is high and we have not been able to pass on increase in petroleum and fertilizer subsidies have gone through the roof. We are unable to take a political decision to increase fuel and diesel prices. I don’t know why we can’t take a decision and is government a charitable organization?

 Q: It’s not a charitable organization; it’s a political organization unfortunately, so they are worried about what happens in Bengal.

 A: The marginal increase in rail fares were brought down, there was some talk that petrol prices have gone up, but that’s being reversed. So, government is unable to take any decision on increasing prices, which means the Subsidy Bill is going to increase and increase.

Q: What is this going to mean for consumers because consumers and manufacturers have been saying that they need rates to come down. Is this going to pass on with the consumers you believe?

A: The deposit growth has been tardy. Deposit growth has been around 13%. Normally it’s 16-17%. So, this year the deposit growth has been low. Now with this reduction in repo and reverse repo, all the banks will have to look at the deposit rates. You can’t reduce lending rates till you bring your cost of funds down. So should we look at reducing deposit rates?

 Q: Do you think that’s going to happen or is it possible or feasible for banks to do that at this point in time?

A: Even at such high deposit rates, the deposit growths are not happening as everyone expected. So if you reduce deposit rates, I don’t know whether further deposit growth is going to happen. If you do not reduce the deposit rate, how are you going to reduce your lending rates? So banks will be in a dilemma - what to do? They will be forced to reduce deposit rates, but the deposits are not coming. Deposit growth has been much lower this year.

Q: How optimistic are you that post this announcement, we are going to be able to see some kind of a turn around?

A: It’s difficult to say. Deposit growths have been less. If you analyze - why are deposits not growing? I think it’s not just gold as everybody says. Gold maybe one part of it.

Q: What do you make of this stance of reducing exposure to gold NBFCs?

A: I agree with the RBI policy. Even now they have been a bit lenient because it is an asset that doesn’t generate revenue. It is an asset, which is dead investment. It is an asset that remains in homes and lockers of banks. If we are importing so much of gold, we should have a reasonably high duty to make it as a disincentive because we need foreign currency.

You see what is happening; we can’t afford to import any amount of gold. I personally feel that on the deposit side, people are spending money at a larger space. Luxury goods and essentials have become more expensive, so savings rate has come down a bit, which is the reason why deposit growth has not grown.


Q: What is this going to mean for the real estate market though, this rate cut?

 A: One of the reasons why deposits have not grown I feel is that money is stuck in real estate. People have put money in real estate neither they are getting homes on time nor there is any return on those because of the dull market in certain parts like Mumbai, some parts of Delhi and Pune. So, people’s money has been stuck in real estate.

Every developer is taking more than two-three years to complete the project than scheduled, so that amount of money is just lying unlocked. This is another reason why deposit growth has been tardy, people are spending, savings rate has come down, gold is one reason, but even real estate has contributed to tardy deposit growth.

Q: Do you believe the Reserve Bank is going to be constraint to act further until and unless the government picks up the pace on what the government needs to do and that was sort of he threw the ball in the government’s court the last time around saying I have done my bit you need to show me the numbers as far as fiscal consolidation is concerned and we still seem to be stuck exactly at that point?

A: In fact we have gone worse I would say. The government must start spending; the government has to spend on infrastructure projects, coal, mining, energy, exploration but we are just not doing that, we have just lost our way and we are unable to do anything. We have come to a standstill. I was in Singapore for two days; I have not seen so much negativity about India.

Q: What are foreign investors most negative about? What are they most apprehensive about- is it GAAR, retrospective amendment or is it the slowdown in the economy?

A: It's a combination of everything. The conclusion is that 'you do what you have to do, but we are ignoring India'. They don't want to come or invest. 'You sort out your issues first'. It was that blunt. The big investors said that they would look at other countries and look at India when the environment was more conducive. But, at the moment there is to be no more investment in India.

Q: Across all sectors?

A: Across all sectors, across all segments of investors. We have a high current account deficit this year. When a current account deficit is high how can it be managed? It is normally managed from foreign inflows. Now if FDI and FII don’t come this year when the current account deficit is high, you get on the other side a weak currency and high inflation.

The way we are going with our rules and regulations and backdating tax provisions and General Anti Avoidance Rules (GAAR) and uncertainty across I think foreign money is unlikely to come to India this year. As a result of which we are in danger that the rupee will collapse and we will again see the signs of higher inflation coming back into our lives.

This is a critical point, it’s a bigger macro issue, it does not impact the man on the street, but it is a fact that to fund the current account deficit you need foreign inflows and that’s why we need regulations. Take for instance airline industry, for four months we have heard foreign direct investment (FDI) is coming. You will bring FDI when the patient dead, when the company is dead. Why does it take four months? If you have decided that you are going to give 49% to Indian airline, why don’t you do it when the need is there?

Q: May be because there are vested corporate interests involved.

A: No, but the point is if you have decided then one person has to take a decision and he has to manage the other team members, the other team that this is necessary for Indian airline industry to survive.

Q: But you are managing corporate vested interest, you are not just managing your own political compulsions and your coalition partners you are also managing corporate interest that have very different views and opinions on whether or not FDI should be allowed for one particular airline at this point in time it could mean a lifeline for somebody else it could be a threat?

 A: Go by what the need of the country is, go by need of the economy. If you need FDI, if you need foreign fund then go by it, go by what your conscious tells you to do, go by what you think is right. Forget vested interest, vested interest will be there everywhere; mining, energy, power, steel. It will hurt some people, it will help some.


Q: Do you believe that this 7-7.5% growth rate that the government is talking about, this is over optimistic?

 A: I think the way we are going in definitely over ambitious.

Q: What would be the realistic target as far as you are concerned?

 A: Between 6-6.5%, maximum 6% to 7% again subject to agriculture performing.

Q: If that doesn’t play out the way it plays out and if the government is not able to cap subsidies at 2% of GDP which it continues to reiterate that it will then how will the story as far as FY13 is concerned going to be?

 A: I believe we are going to be in a very difficult situation unless we do something. The back office companies (BPO), which give us a huge amount of income, the tax people are going after BPO companies on transfer pricing. Large number of captive BPO companies like JPMorgan and Citi who have 10,000-20,000-40,000 people working in India have got notices from the tax department on transfer pricing.

I know for a fact that many of these big international banks have decided not to add a single staff more in India and use Philippines because of this uncertainty. You have to come up with some kind of clarity that if this is transfer pricing this will be the tax. Don’t do it after people have come in.

There has to be some clarity before hand. I agree that tax may have some point on transfer pricing if they are showing no profits here and the profits are being shown at the headquarters you have to pay tax. But what is the amount and how much is the tax. Some clarity must be there.   

Q: But is the sense that you are getting from corporate India at this point in time, is the tax department has it become a point of harassment now?

 A: Uncertainty of tax has become harassment.

Q: This is something that I heard as well that pretty much everybody got demand notice in March this year. So this is not anecdotal stuff, this is real stuff?

 A: HDFC Insurance got a notice of Rs 795 crore in life insurance. We have not made 1 rupee profit; we have not distributed dividend once in 12 years, and a Rs 795 crore odd demand on negative accumulations of reserves.

Q: How are you dealing with it?

A: We have to go for appeal, immediately we had to go to lawyers and it got reduced to Rs 25 crore. I agree that tax department has a target, the finance minister has given a target that you have to collect this money. But don’t do this kind of thing. If the industry has done badly your tax collections will be less, you cannot meet your targets, be realistic  

Q: You have always been an India bull. Have you turned bearish on India?

A: I am disappointed, very disappointed at the way we have shot ourselves in the foot. It's a pity that the political system has brought us to this kind of a situation in India. We were right on top; two years ago India was the darling of the international community.

Q: What do you think has gone wrong? If I were to just bring up one example of the retrospective amendment for instance - what does that tell you about the mindset? Does it tell you that this is a mindset of arrogance, inductiveness or is it just plain simple short sightedness myopia?

 A: I think it’s a combination of a lot of factors including going against your own Supreme Court. If you have seen the Supreme Court’s orders twice, they were very categorical. The government says that it has a good legal system, but whatever the Supreme Court decides the government turns it around by passing a law. All this is putting people off. I am not worried about foreigners. You ask any top 10 Indian businessmen - how much money are they investing in India in the next two years and please see what their answer is. I have talked to them.

Q: Are they telling you - they don’t want to invest in India?

A: We are on hold.

Q: I don’t want to qualify it as young or old but Deepak Parekh stood out as the angry man of corporate India through 2011. Are you feeling angrier in 2012?

A: No, as I said, I am feeling disappointed, I am feeling sad, I am feeling depressed that how have we come to this position. Why we can’t get out of this position. It is really sad. I think you should do a poll of the top 100 companies internationally and see what their outlook for India is or what their interest in India is.

Q: When you see headlines saying India has lost its magic, India has lost its sheen - this is not an exaggerated picture, this is the truth?

A: This is reality; this is unfortunate. You feel as India optimist, perpetual optimist on India - we feel disappointed that unfortunately we have come to this position today. Even the opposition is also partly responsible. For instance - you are unable to get bills passed. Decent in debate in a democracy is a must. It is a prerequisite of democracy, but not disruption and dislocation of parliament.


Q: We accuse the government; politicians, opposition parties of not thinking about the country. Does corporate India really think about India? Does it think about the country or does it think about its own profits and own expansion of market share? Corporate India hasn’t really covered itself in glory either over the last few years?

A: I am not batting for corporate India. If they have difficulty in setting up new projects - why will they go through that hassle when there is nothing that is black or white and everything is grey? Uncertainty, everything is unknown.

For instance, if you want to start a project, you will not know how much it is going to cost to you, when will it be complete and when will I get all the approvals? So who is going to take that risk? Who is going to take that chance? You can’t blame corporate India but our rules and regulations, number of permissions and approvals and multiplicity of agencies, central, state departments that get involved. What have we done for simplification?

Q: What do you think is the problem because the solution is simple - the solution seems so obvious and yet the politicians refuse to be moving on that part of actually addressing any of these issues - what seems to be the problem? It almost seems like there is a vested interest to see India fail?

A: I am unable to say what is keeping these politicians the way they are or not willing to accept that we are going through a very bad patch.

Q: Is this worse than the early 90s?

A: No, I don’t think it’s worse than 90s. We are much stronger country now than what we were then. Our reserves are full, we have got huge amount of reserves; fine, our foreign debt has gone up, but we can service that. We have to get up self and take some four-six key decisions.

Q: You were talking about banking licenses and this is something that the suspense continues or the question mark continues on what is going to be the fate as far as the future is concerned? There is silence from the central bank. There is silence from the government. One doesn't quite understand where things are. You saw the guidelines and post that not much have happened on that front.

A: The objective of giving new bank licenses must be first discussed rather than flooding the market with new licenses. I am not saying that I am sure the companies that want to go into banking will think that because we have a bank I am saying that. I am not saying that. The point is we want to do inclusive banking. We have 6 lakh villages in India. Only 5% of them have bank branches and after so many years we have not been able to increase branches in rural India.

Setting up branches in rural India is going to be a herculean task, for 60-70 years it has not worked. We need other models. How do you make rural credit accessible? You are not going to give new licenses and tell them go to rural India and start opening branches. The brick and mortar model cannot work.

You have to use technology, telecommunication and you have to have agency arrangements, distributor arrangements rather than to have a building called bank in rural India. I don't know whether new banks will be allowed or will be able to go into rural India, which all of us or so many public sector banks with thousands of branches are unable to do.

 Q: Do you think that's where it's tough?

A: In the sense what is the role of new private sector banks? What would be the role? The objective was that we want more rural lending. We want access. A rural India which has 70% of the population must have access to banking, not only lending but even deposit schemes and savings products and all that.

That was one of the objects of new banks and how do you make our economy financial inclusive. I don't know whether that object will be achieved by giving new bank licenses. If that's not the objective then it's all right.

Q: You are somebody who has lived your life by numbers, by data and yet at the same time I believe you don't walk under a ladder, you stop every time a cat crosses the road. Is this all myth or is this true?

A: True. Just some whims and fancies you have.

Q: Is it just a cat and the ladder or is there more as well?

A: No, cat has to be black cat.

Q: With a black cat you will not cross?

A: Yes, with a black cat you have to walk back nine steps.

Q: You won't walk under a ladder?

A: Yes, because something may fall on your head. It's a safety precaution. There is no superstition.

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