Uday Kotak pushes for deregulation of energy to up govt rev

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Uday Kotak pushes for deregulation of energy to up govt rev

Kotak Mahindra's managing director and executive vice president Uday Kotak says that the government of India has to find innovative ways of increasing its revenues and keeping its costs tight. "It has to deregulate the energy sector. There is no alternative," he says.

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With the world economy going through a prolonged phase of economic slowdown, Kotak Mahindra 's managing director and executive vice president Uday Kotak says that the world envies India's 7% growth. "However, if eurozone muddles through and the ECB keeps on giving enough funding to the banks, I think India must take this opportunity and get our house in good shape," he said at the sidelines of the Davos conference.

Kotak believes that Indian corporates are overly dependent on credit lines from the eurozone, and any blowout in the area will have a drastic impact on the economy. "That could lead to significantly more pressure on the liquidity side then what India is prepared for today," he added.

According to him, the Government of India has to find innovative ways of increasing its revenues while keeping costs tight. "It has to deregulate the energy sector. There is no alternative," he says.

However, the sense he gets while attending the conference is that European leaders will manage to muddle through 2012 without any major blowout. "They will keep on kicking the can into the future without getting some real long term solutions," he said.

Below is an edited transcript of his interview with Menaka Doshi. Also watch the accompanying videos.

Q: On one hand, we are looking at a great degree of gloom and doom when it comes to certain sovereign issues regarding Europe, and on the other hand, business seems to be fairly alright! Decode this.

Uday Kotak: I am here for about a day and a half and my early signals are that yes Europe has its challenges, but it is a muddle which they will find a way to carry on. I don't see an immediate crisis and from that point of view they will keep on kicking the can into the future without getting some real long term solutions but ensure that there is no blow up.

Q: Is that just pushing the blow up two years down the line? Could we potentially be having this conversation two years from now as well or will it mean that time will try and sooth and heal the wounds?

A: One is time and secondly if you keep a huge amount of liquidity in the system at very low interest rates for long periods of time, there is a possibility that you partly inflate the economy and solve the debt issues. Yes the structural issue of the euro itself is more fundamental because it's about nationhood and fiscal management, but I don't think it's a 2012 blow up problem.

Q: When you say blow up, what is it that you thought would have happened and is not going to happen? Are you ruling out the possibility of an orderly default or disorderly default or all of that?

A: I am saying even if say there is a "Greek default", it will be done in a manner which doesn't upset the system.

Q: How can that be with Greek banks and other European banks holding a large amount of sovereign debt?

A: It will be some sort of a voluntary agreement with creditors and restructuring into new paper. This is the kind of stuff which Indian banks have been doing from a long time and managing it well, so why not the European creditors?

Q: We had the Fed keep rates unchanged last night and they said they would do so to late 2014. Is that how weak you see the economy being for such a prolonged period of time that you intend to keep rates low all the way up to 2014?

A: It is pure and simple risk management. The risk of the downside is significantly higher than a loose monetary policy for a while and therefore air on the side of caution, which is what US is doing, which is what Eurozone will do.

My sense is that Germany wants other countries in the Eurozone to reform, but doesn't want the Euro to break up. So it will do this, put pressure at the same time keep on making sure that there is no blow up.

Q: So central banks keep rates low for an extended period of time we are now talking 2.5-3 years, may be even longer for the eurozone, they print more money to be able to help restart their economy. Someone is going to have to pay the bills someday?

A: It happens two ways. One is you start gradually getting inflation through loose monetary policy over long periods of time. At the same time, you keep on working towards improving the fiscal expenditure side. As David Cameron mentioned, you will have to have a very easy monetary policy but focus on getting your fiscal policy better. When I heard that, I just wondered in the Indian context we are just doing the opposite.

Q: You are saying we are not going to see a blow up?

A: I hope there is no blowout and my sense is coming to Davos that it is unlikely and a reasonable muddle.

Q: If there is a blow out, what impact will it have on India, and if there isn't or since you say the likelihood is low, then how India get saved so some extent?

A: If Eurozone gets out of control, the interconnectedness into India is higher than what we in India are prepared for. So the situation will manifest itself in significant withdrawal of credit lines by European banks which are quite significant to Indian corporates. That could lead to significantly more pressure on the liquidity side then what India is prepared for today.

However, if eurozone muddles through and the ECB keeps on giving enough funding to the banks, I think India actually has an opportunity to once more to do the right things. In the next few months, India must take this opportunity and get our house in good shape and the world envies India's growth of 7%.