Feb 16, 2013, 06.20 PM | Source: CNBC-TV18

Uday Kotak: Growth vs inflation; we have to risk one

Indian market has set its eyes on the move that the finance minister will make in the upcoming Budget. The expectation from the FM has increased after the successful global road show.

Indian market has set its eyes on the move that the finance minister will make in the upcoming Budget. The expectation from the FM has increased after the successful road show to woo foreign investors. 

Udayan Mukherjee, managing editor, CNBC-TV18, speaks to Uday Kotak, chairman, Kotak Mahindra Bank, about the state of the economy and his expectations from the finance minister. 

A combination of fiscal deficit and monetary policy play will determine future market movement, says Kotak in an interview with Mukherjee ahead of Kotak Annual Global Investor Conference which will commence from February 18-20, 2013.

He highlights that Europe, which suffers from high inflation similar to India, has undertaken steps like gradual austerity and at the same time they have eased the monetary policy. India should also take some steps of austerity to reduce government spending and curb the current account deficit and at the same time the central bank should step in with quantative easing to further aid the economy and boost growth.          

Also read: Budget can't solve infra, cap goods woes: Vibhav Kapoor  

Below is the edited transcript of his interview to CNBC-TV18.

Q: Do you think this time the level of expectation is much higher on the backdrop of what the finance minister (FM) has been doing since September?

A: I think FM's global trip has been received positively and investors are eagerly looking forward to the Budget. It is comforting to see the way in which the FM is looking at the Budget deficits, but many issues need to be addressed as we look at the economy.

Q:  How do you think this year will be for the equity market? Surprisingly, last year was good for the market. At the start of 2013, what are your expectations?

A: I think one needs to see how the combination of fiscal deficit and monetary policy plays and works out together. Europe has undertaken steps like gradual austerity and at the same time easing monetary policy.    

India is finally moving towards fiscal tightening which the country needs to do gradually, if the tightening happens too fast, then it can affect growth and at the same time one has to watch how monetary policy will pans out. Unlike Europe, India also lives with high inflation. Therefore, the challenge is, how do we ease monetary policy when the fiscal is correcting gradually and handling inflation. How the policy responds to these combinations? That is the answer to how the market will behave.

Q: Everybody wants to see fiscal consolidation, but what ramifications would it have for growth, as growth has also come off and there is hope that through 2013, growth will get rekindled, many observers are little disappointed with low growth recovery. Will fiscal adjustment come at a heavy price of seeing tepid growth throughout this year again?
A: Whenever the fisc is tightened, there is an implication on short-term growth while the long-term economy gets healthier. It is tricky when the election is one year around the corner and at the same time, Europe has gradually started tightening fisc, but eased monetary policy.

In India, how do we handle monetary policy with large current account deficit (CAD) and high inflation? Do we loosen it with the risks attached while fisc is improving and one year before an election?

Q: If you were in the shoes of the policymakers how would you play it?

A: I think the policymakers may have to take a risk on at least one parameter, either inflation or growth. I think fisc containment should be gradual so there is more moderated improvement in the fiscal deficit.

Q: The FM seems to be a man in a hurry. He has been making promises and is trying to meet or better fiscal deficit targets. Do you think there is a risk that he might do achieve either his promise to global investors or to avert a ratings downgrade he might actually move swifter than you would like him to on the fiscal deficit front?

A: The best time to discuss this is post Budget.

Q: Has the perception of global investors on India improved dramatically? Pre-September the mood that was prevailing in India, do you see a sea change going into your conference next week?

A: We have received very good response from investors and participants. Around 500 participants from various institutions in India and overseas across all geographies will attend the conference. There is an air of expectation that India is finally moving on a more positive track on policy front.

Yes, there are macro challenges, so it is critical to understand what is happening in India at the ground level so investors are coming to feel this pulse directly. We are very happy to see lot of investors will attend this conference combined with the fact that the corporate interest in meeting these investors is at a record high. During February 18-20, around 4,000-5,000 meetings will take place between various participants 

Q: In 2012, India received FII flows of around USD 24 billion which surprised many people. This year started even on a better note. We have already pushed USD 7.5-8 billion in the first six weeks of the year. Do you expect 2013 to be a bigger year in terms of liquidity flows, the way you are reading global markets?

A: Global liquidity is easy. After the Davos summit we can understand that there is relief and no imminent worry of a crisis. Interest rates around the world are low, so liquidity will flow where opportunity is present. How we balance fisc tightening, handling inflation therefore monetary policy and at the same time provide growth to the investors is the real issue for India. It is a very tough combination to handle, but if we are able to handle this, then we will see significant flow of money coming into India. 

India's current account is an issue and trade deficit numbers indicate that we have a run rate of USD 240-250 billion of trade deficit in a year. Therefore, portfolio flows are no longer just welcome, they are necessary for India's sustainability.

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