At a time when the financial sector is witnessing a major transformation, Indian savers have lost out on capitalising returns from large private players such as HDFC due to its foreign ownership, according to Uday Kotak, head of Kotak Mahindra Bank, and also one of the most successful entrepreneurs in the country.
As the chief of the fourth largest private bank, Kotak questioned that allowing global investments has come at a price to the domestic investors and India as a nation had to significantly give up its wealth to a lot of people outside India and beyond.
He said this addressing a panel of senior Indian economists including former chief economic advisors and Reserve Bank of India governors such as Bimal Jalan and YV Reddy, at the Indira Gandhi Institute of Development Research in Mumbai.
“On a more fundamental basis, India in order to fund its P&L thereafter has raised a disproportionate level of equity and in a globalized world where global equity was easy, India found it feasible to fund these balance sheets. But this equity has come with a cost," Kotak said.
HDFC or Housing Development Corporation of India, the biggest private housing finance firm, has a total share of 75.99 percent held by foreign portfolio investors as on September end 2017, as per data on BSE.
On the other hand, foreign portfolio investors hold 39.86 percent in Kotak Mahindra Bank as on September end.
Uday Kotak mentioned that HDFC, one of the jewels of India, had in early 1980s, a small market capitalisation of Rs 500 crore and 100 percent Indian-owned. The same has now increased to Rs 2.80 lakh crore and it also has a major lender HDFC Bank as its subsidiary.
“It has created value but here is a company that has garnered domestic savings for domestic housing needs and 85 percent of that company is today owned by foreign savings. The entire benefit of this growth of Rs 500 crore to Rs 2.80 lakh crore has benefited a saver in Boston or anywhere else in the world," Kotak added.
India versus China
Drawing parallels between India and China’s economic growth from the 1970s to now, the private sector bank chief said, “Going by per capita income, India stands at what we believe is a lower middle income level of USD 1800 per capita and the same period with population marginally larger than ours, China stands at USD 8,500."
Doing some math, Kotak pointed out that for India to get to where China is today, we have to grow per capita at 8 percent for the next 20 years…and if we add population growth of 1 percent per annum, then India has to grow at 9 percent in absolute real GDP for the next 20 years to get where China is today.
“That bothers me as an Indian and that we need to ask where did we really lose out in the race,” he said also asking if we are competitive enough even on the trade side which helps the profit and loss which is India’s current account.
Hard growth with softer aspects
Kotak also raised questions on the core area of hard growth versus soft aspects of the growth. "Is India at a stage where it really will find it a challenge because of the softer issues, to manage a hard growth of 9 percent GDP? How are we going to get this balance? How are we going to get an ecosystem with better distribution, the whole area of teachers, judges, the whole machinery of the softer part of India and where is that getting lost?
Speaking about the way digital transformation is leading top five technology companies painting the growth story, he said, “If you see technology companies – Apple, Google, Facebook, Microsoft and Amazon are all heading to be individually trillion dollar companies and even today they are larger than India’s GDP."
According to him the financial sector is undergoing transformation including more financial savings and digital disruption.
"Financial sector is getting redefined. Does the financial sector still need 70 percent state-ownership or is it time to be thinking differently? And as the competitive pressures go up, how is India and India’s financial sector set to cope with the need for talent and a whole host of changes of the modern economy?” Kotak concluded as he put forth the questions before the experts.
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