India’s growth rate should be in the range of 6%: HDFC Chairman Atanu Chakraborty

Atanu Chakraborty, chairperson of HDFC Bank

With the budget barely 10 days away, Atanu Chakraborty, chairperson of HDFC Bank and a former finance ministry official, is ideally qualified to give us some perspective on the considerations that weigh on the minds of policymakers as they put together the annual accounts.

Chakraborty spoke to Moneycontrol about the government’s priorities, possible tax benefits for the middle-class, growth prospects, and attracting businesses to India, among other things. Edited excerpts:

Q. What must be weighing on the finance minister’s mind at the moment as she puts together this budget?

A: This is virtually the last main budget because next year’s budget will be just before the elections and will have its limitations… We have a backdrop of five fiscal deficits, which need to be reined in…

At the same time, they will have to continue with capex because that has yielded dividends, bringing in infrastructure which is much needed, as well as continuing pharma-related policies, and issues of MSP (minimum support prices for farmers), which because of inflation perhaps would need some correction.

Lastly, the middle class, personal income tax, which might call for some amount of downward correction because corporate tax has been already corrected. But again, all put together, high interest because of a very high debt to GDP ratio, does put certain limitations… Within one year, you can only do so much. So it's going to be a balancing game throughout the year as to what is prepared in the budget estimates and how the year progresses.

Q. There is talk about continuing with schemes announced during the pandemic. On revenue collection, while there has been buoyancy in tax collections, divestment hasn't really added up. What should be the key priorities for this government as it presents its last full-year budget?

A: The Garib Kalyan Yojana was a great success, especially the food component. Now that has been hardwired into the food subsidy programme. Therefore, I do not see much load on the food subsidy side. To that extent, that part gets taken care of and also the schemes like ECLGS (Emergency Credit Line Guarantee Scheme), which were very successful and the banking sector remained in the pink of health because of that kind of lending. It has also spawned a large number of government schemes which are guarantee-based, and not subvention-based. So a better credit quality by public sector banks would ensure that the load on guarantees is less. To that extent, I do not see a conflict between the ongoing government programmes and managing the fiscal math. It’s the interest rates, which are high on the borrowing already, the current borrowing, that affects the cash flow more than anything else.

On the revenue side, buoyancy as well as tax efficiency are where some amount of delta can come. How much? Well, we'll have to see during the course of the year.

On divestment, while large-scale divestments would be limited, as I mentioned this being the last full year budget, all governments are very careful so as not to have any controversy... But there are minority stake sales… Selling minority shares not only meets the overall objective of divestment, but it’s also the correct thing to do. The monetisation of these companies… for the welfare programme is the ideal thing.

Q: What are the concerns that bother you as someone who has drafted some of the most significant budgets of this government? What are the key concerns that should drive policymakers at this point?

A: The government bore the brunt of keeping growth up during 2019, 2020, 2021, 2020, and 2023. Now, with green shoots in capex by the corporate sector – because they are now already on the high side of capacity utilisation – some of them are planning capacity addition and there is pressure on credit. Therefore, the important thing is to provide them space for credit expansion, which goes to the private sector. That's a critical part if we have to sustain growth because growth is the key. We need to sustain growth beyond the base effect.

The second concern is inflation. The RBI (Reserve Bank of India) has been very, very proactive, but it's a sticky inflation. It eats into the poor much more than anybody else. And we also have to keep our domestic consumption continuously up. Therefore, it is more important that inflation be tamed, both through fiscal means as well as primarily through monetary means…

That brings in enough surplus towards consumption and keeps our growth rate up, which naturally brings in private sector investment, brings in more jobs and capex has to keep going up. So, these would be the pillars which should be driving any budget or any sort of overall economic policy statement.

Q: Is there fiscal room for the government to benefit the middle class? Maybe revise income tax rates, maybe put together benefits for those who lost jobs during the pandemic?

A: There is room, I feel, for starting a programme of gradual rationalisation of personal income taxes, because it's not the Richie Rich who should benefit, like in the US. But up to certain slabs, up to certain rates, perhaps, rates coming down would spur consumption, which will bring back the taxes. And if consumption goes up, investment will go up, employment will increase, so there would be a virtual cycle, or a virtuous cycle shall I say, in this entire thing.

Q: So there is fiscal room, you think, to make this revision?

A: A very gradual experimentation at certain slabs would bring back, will give the necessary kick to consumption. So that should balance.

Q: With the talk about the China-plus one strategy that India is hoping to capitalise on, from a policy perspective and the budget perspective, can India give more incentives for businesses to come in and set shop here?

A: Businesses tend to move to a place where there is consumption. And we should not take our good consumption base lightly and should try to keep increasing it. China has a huge consumption and that's also one of the reasons people shifted there.

And then they had huge financial support coming out of Hong Kong, which GIFT City is trying to become, but it has a long way to go. So development of GIFT City would be very important.

However, the important thing would be that our consumption remains pretty high. Otherwise, people would have choices in picking N number of smaller countries like Vietnam and the Philippines and they will tend to go there and use them as a base to supply China or markets like India. It's only when your market appeals to people that the manufacturer also comes in because that obviously has lower logistics costs. So we must not lose sight of that.

Q: Does the prospect of a global recession worry you or do you think India is protected?

A: What protects us is our consumption because growth largely comes from consumption. But the export scenario would not be as strong this year as previously because of low global growth rates, as the IMF has also projected. Senior bankers in the US are already talking about recession…

I see the IT sector being conversely affected because you would have seen layoffs in the US – that should bring more business into India because they'd like to cut costs.

So I see a positive impact and that's our major exporter. However, for the rest, there would be questions. But the inequalities that COVID heightened or accentuated mean that many high-end product products like iPhones would continue to sell in advanced economies. And if we keep producing here… to that extent we would be continuously protecting ourselves on the external sector.

The second part is how currencies behave – that is, the dollar is strong, and would continue to be strong. So the important thing is that a lot of dollars flow into the country. That could happen simultaneously with our bond market development. If the bond market is developed, then we would very quickly get into the global indices of passive funds for bonds, and a large inflow of money would take place from there.

Apart from the fact that we are already on the emerging market funds for the equity side. So our companies are now picking up further additions and growth. That brings in the money on the investment side…

So if our domestic consumption keeps going, to that extent, we'll keep getting FDI as also from the China-plus one strategy... So on the investment side, I see the development of the bond market should get us a good hefty chunk if we can ride into the global bond indices. That should help and the dollar will also help us in shoring up our dollar reserves.

Q: What's your outlook on the rupee? Should we let it fall? Should we let it find its correct value? And for 2023, how do you view our currency management?

A: Currency management is the preserve of the RBI and it largely allows it to float, except for intervention on volatility. What they are doing is concentrating on volatility – the rest, they are allowing the market forces to play. And I think by the book, that's the best way to do it. Then it reflects the economy.

The rupee has done rather well. We all thought that perhaps hell would break loose – none of that happened… Volatility was taken care of and there, a good reserve helped. So the important thing is as you build up your economy, the reserves get built up. And that reserve acts as a buffer which has a counter-cyclical nature in itself.

Q. What is your outlook when it comes to growth, inflation, the rupee? Will India continue to grow at a robust pace? Or will growth slow in 2023-24?

A: We must see that we managed COVID well. The rural areas held up well, the urban areas came back very quickly, and the vaccination programme was a great success. And then the poor were protected through Garib Kalyan Yojana… So there is a sense across the country and globally too of a sense of security and stability because of that very, very deft management.

Secondly, the banking sector… I've never seen it healthier. If you see the public sector banks, their credit, they are almost snapping at the heels of the private sector. Of course, their gross NPAs are still high. They have some more scope of improvement there… And their trade deposit ratio is much lower than that of private sector banks. So there is space for investment.

Third is the formalisation and digitisation which have gone hand-in-hand. So that is the third push to the economy, because you must look at the drivers for the economy.

And fourthly, as I have mentioned, I see IT getting a big push on account of global happenings.

I do feel that the inflation fight will continue for some time – at least the next couple of quarters. So we should expect interest rates also to be a tad higher. But they have been in this range earlier too. And I think our investments can take that into account.

On account of these factors, our growth rate should be in the range of 6 percent. It will be helped by domestic consumption, as well as remnants of the base effect, which would continue at least in the first quarter, and then after that largely on its own steam.

Controlling or giving a trajectory for lowering of the fiscal deficit would be a very good signal not only to inflationary expectations, but also a good signal for investment, which otherwise tends to feel that possibility the rates would go up and investment gets crowded out.

I do look at 6 percent growth rates certainly, and inflation getting more benign in the second half. But then last year was a year of predictable unpredictability. This year, that unpredictability has come to the fore, but they have a probability attached to it. They will play their part – oil prices, for example, global recession, how deep it gets. We have certain expectations for this to remain reasonably benign, but well, it's for the future to tell us where they are.