Cash ban positive in long-run; investment push needed: Experts

While there will be a drop in the Gross Domestic Product (GDP) in the short-run due to demonetisation, it is a good step, Aditya Puri, MD of HDFC Bank said. Puri, who heads CNBC-TV18’s India Business Leader Awards (IBLA) jury, further said that if demonetisation is executed as envisaged, then it will bring in a lot of efficiencies. A growth rate of 7.5-8 percent is possible for India, according to Puri. Speaking on non-performing loans (NPAs), SBI chief Arundhati Bhattacharya said that many large NPAs are now becoming operating project and some resolution is coming in large ticket NPAs. While demonetisation has hit business confidence, it will help move financing of small businesses to official channels, she added. The experts of the IBLA jury are cautiously optimistic for 2017. Shikha Sharma of Axis Bank said that consumption and investment need to kick-start for growth. Post cash crunch, recovery has been much faster, she added. The Goods & Services Tax (GST) is a worry, said Harsh Mariwalla, Chairman of Marico. It is important for the government to find right factors of growth, believes Sanjay Nayar, CEO of KKR India. Investment led factors, especially private investment, are needed.

Below is an excerpt of a panel discussion to Shereen Bhan on CNBC-TV18.Q: 2016 perhaps hasn’t turned out as per expectation November 8 has certainly been the biggest disruption that this country has seen. How would you sum up the year that’s gone by private sector investment hasn’t really picked up, growth continue to be patchy, has the year gone as per your expectations till the November 8?Puri: Well, it was going as per our expectations and obviously we can’t look at things in isolation – so maybe if you say growth hasn’t picked up that you have to see in the context of what happening to the rest of the world. If you see November 8 then demonetisation with the purpose that it set for itself is a good idea. I don’t want to go into all the difficulties and the problems people had which they definitely had. I rather put that behind us and say if we look forward – I think we will reap benefits.Q: What kind of benefits do you expect us to reap, because that there is a lot of questioning of the enduring economic benefits that this move will actually have?Puri: If they are able to execute the way it was envisaged then 3 things will happen. Obviously, a lot more money will come into the system which we are all seeing, which is the savings and at least some of the non-rigid black money would come in that increases the money supply that is available for productive usage that one.Two it reduces the cash percentage in the country which normally the more cash you have the more ability you have to go away from the trodden path. Three we must understand cash is a very costly commodity. MasterCard estimated that the cost of cash in a country is almost 1 percent of GDP if you have a 90 percent of a cash economy and last but not the least it brings a lot of efficiency if we are able to digitise – so within the parameter that a digitisation is successful, we would be able to bring maybe about 70-80 percentage of cash back into the system then this temporary disruption should be taken care of not to it complete extent, but in the short run there will be a drop in GDP – how much I don’t want to venture to suggest because I don’t have the numbers. There will be but it will come out all right.Q: Since you said that we should talk about the road ahead now and you have pointed out some of the challenges that we are going to have to deal with in the near term, but at the end of the calendar year 2016 at the start of 2017 the global picture perhaps look even more uncertain and what it means for emerging markets perhaps the uncertainty is even larger because you are seeing the developed market story pickup and the develop markets now chart out a course of revival. In that context than what you believe 2017 holds for India?Puri: I saw your India with Ruchir Sharma – so first thing that the narrative of the Federal Reserve doesn’t match with the performance of the economy, so when they are talking about a lot more rate hikes and when you match that with the GDP growth and the rate of unemployment as well as inflation those two don’t come together – so yes they are doing well best among the worst. Europe is picking up to some extent and we always hear this when it comes about, but if we are fundamentally able to achieve a growth rate that is among the fastest globally than I don’t think we have as much of a problem as being made out. But we must clear those supercilious rates that we talked about those will probably not come about. You are not going to have the 9 percent etc, but if you achieve 7.5-8 percent you will still be a good destination.Q: One of the other challenges and just taking that point forward is that the world is now turning more protectionist, deglobalisation is a real thing, it impacts your industry perhaps much more than it impacts anybody else here in the room. So, what should the Indian response then be. I know you have been trying to do that at Infosys but what should the larger Indian response be if we see import barriers even non-tariff barriers being imposed by the developed market?Sikka: I see only one way forward and that is innovation. Innovation, entrepreneurship, leveraging our collective talents, our intellectual capital towards becoming more innovative, more confident, more entrepreneurial, I see no other way. The year has been Coldplay said closing walls and ticking clocks, it has sort of been like that.All over you see signs of protectionism of walls closing down and that is obviously not a good thing but it does point out the need for us to have an identity of our own, have a strength of our own. This has also been an year where Artificial Intelligence (AI) has showed up to the forefront as a great enabling technology and also a great threat, disruption of our times and the only response that I see to the kind of work that we have done, certainly in the IT services world where we have taken the more mundane, the more mechanical, the more mechanisable work and done that from here at lower cost that is going to go away, make its way to automation and therefore the only way forward for us is to become more innovative, more entrepreneurial and become more confident of our ability to innovate.Q: If I were to ask you specifically what would that mean and if I were to ask you to help us redraw the landscape so to speak for Indian IT or for any of the sectors that are to a large extent exposed to the outsourcing services model what would it entail?Sikka: It would mean becoming more strategically relevant to our customers, to the businesses of the world, becoming more imaginative. We do a lot of - if you look collectively at the IT services industry we solve thousands of great problem for our clients, for our businesses but we don't look inside that to see why, to see how are we doing it. If we become more explicit about it, participate in the strategic journeys that the businesses are going through don't forget that in the last 10 years something like 34 percent of the Fortune 500 have gone away, they are not there anymore. 10 years ago the Fortune 500 that was there only 85 percent of them remain, something like that. So, that to me is a colossal failure of the consulting industry of the sort of advisory industry in the sense of strategy and so forth. I am sure they all had innovation departments. So, there is a great opportunity for India and for the Indian services industry to really become a partner in helping businesses become more innovative.Q: But are we anywhere close to being there?Sikka: No, not yet, but we have the potential to because the world is being rewritten a software and all we know is software – so there must be a solution there._PAGEBREAK_Q: If I would ask you to sum up 2016 both in terms of what your expectations were where perhaps we done better and where you would like to see more action and also in terms of 2017 give us a sense of what we should expect, this big hope is that we are going to see this big fall as far as interest rates are concerned that some sort of dividend is going to flow to Jan-Dhan accounts by way of what the government does decide to we don’t know whether that is going to happen. The possibility of a farm loan waiver the buzz is picking up practically every day. Are you feeling concerned about 2017 already?Bhattacharya: Well, not really concerned rather I would say that I have a lot of hopes of 2017 and it is based on the realities of 2016. What I would like to have happened better in 2016 is possibly the resolution of the large value non-performing assets (NPAs), but though they didn’t happened in 2016 I am quite certain that it will happen in 2017.Q: Why do you feel that strongly about it?Bhattacharya: Because we have been pursuing this matters now for quite a while and we can sort of now sense that times are upon us when these will necessarily have to be resolved. There is a time for everything and you cannot go beyond that time for anything and in respect of these assets we can now almost sense the fact – it is based on also the reality that many of these projects are now almost completed. Already they have started production, they may have been classified but they are operating and therefore it makes sense to resolve these and beyond your way. So we feel that at least the top 20-25 large value NPA’s that we have – we will 100 percent see them getting resolved in 2017 either way that will actually be a very major step for the banking industry.The second thing that I think and here I will add up what Vishal said and what Aditya said, the demonetisation bit actually enables a lot of small entrepreneurs to become financially included. Now most of these people they were doing cash business. Now that they are forced to do business on the electronic or the digital channels it will be much easier for the official banking system to fund them and believe me in India one of the reasons why we are adding one million people to the work stream and still you don’t have social unrest is because there is huge amount of entrepreneurial talent in India and if you go to any of the tier 3-tier 4 cities of this country – you will see small-small businesses everywhere and these businesses actually – 94 percent of them are funded from the non-official channels, where the interest rates are much higher.Actually, this demonetisation gives us a perfect platform to push these people on to a formal system and ensure that the financing that they have still not been able to access that we are able to give them. For instance I will give you one instance – we run these rural training centres called Rural Self Employment Training Institute (RSETI) and we have about 117 of them. We have trained in the last 4 years about 2 lakh people there. Our placement rate is 49 percent, but amongst those that were placed the few that we have set up in business – today they themselves are employing another 8-10 people – that is the kind of entrepreneurship that we have really got to give wings to in India, because otherwise it is not possible for formal employment to really scale to the extent that it required.Q: What are the key risks that you believe we will have to contend with in 2017?Bhattacharya: The risk is still that the demand needs to come up. The demand is there.Q: Has it been hit further?Bhattacharya: Yes, it has and that is where we need to give comfort that this is a temporary hit. If the business confidence manages to perk up demand we will have it all. Because other than these two all other macroeconomic parameters are fully in place. So, basically these would be the main risks.Q: You are looking at what is happening on the M&A front, you are looking at what is happening on deal street, how much has business confidence taken a beating post November 8 and what kind of risks and challenges do you foresee as we look into 2017 also what are the big opportunities that you see?Shroff: Let me look at 2016 first, couple of points sort of stand out. The year has seen a plethora of legislation. So, we have seen parliament very active, whether it is things like the insolvency legislation, GST and others. So, we are really getting back to parliamentary form of legislation on important issues.Q: Even if we didn't have a winter session, we have managed to actually do a lot.Shroff: It has been a great year for legislation. Secondly just from a governance point of view, and I am not referring to any cases. The maturity of the debate in the country has exponentially increased in the last year. From essentially very technical type of conversations that used to take place a couple of years governance both as public governance as well as private governance the conversation has moved to different levels. It is work in progress and we will see much more happening in the next year. So, even as professional services firm the kind of deeper issues that we see our clients asking including things on family governance, how family should be governed, given that 70 percent of corporate India is promoter controlled. So, we are seeing version 2.0 of governance in its broadest concept happening. That is one change that I see.At a broader political economy level I see some mixed signals. At some point you feel that the government is moving left of centre. I don't know where you would classify things like demonetisation and others but there is a drift to the left. At the same time things like insolvency legislation that is as capitalistic as you can get. So, there is a bit of confusion as to which direction we are headed. From the corporate India as we see it they are little low just now but if you ask them the question about how do you feel about the second half of next year they are still quite confident and they will get back into strong investment mode, so deal street should be good.This has been a good year for M&A activity but if you look deeper all the M&A has had a stressed asset problem on the sales side. So, as a large transactions they have been implemented in a private environment, they have been implemented without a coercive process of law but they have been stressed and as Mrs Bhattacharya said you will see a lot more next year. Maybe not under the bankruptcy act but possibly because of the threat of it as well.Foreign investors including private equity and Sanjay will have more depth on that still very optimistic on India in terms of again our deal portfolio as a professional services firm we see private equity as one of the most active segments. They are putting money to work in India. So, I don't think 2016 was a bad year at all. We shouldn't judge the whole year by events, if you take the whole year in the round it has been terrific year and 2017 will be even better._PAGEBREAK_Q: Better than 2016?Shroff: Yes, but I think again the first quarter will be a bit debatable, it will take some time. But if we are having the same conversation in December 2017 I will be a happy guy.Q: I want to pick up on the point that Mr Shroff mentioned there about perhaps this fear that we are now going to move towards populism over fiscal prudence. Does that concern you and again as far as risk opportunities and challenges are concerned what is 2017 look like? Sharma: I think the opportunity is what Arundhati and Aditya both referred to that if we can kick-start consumption and if the government can focus on accelerating investment in infrastructure then it can actually change the mood and change the mood pretty quickly.Q: But they try to do that already with the previous budget whether it railways spending, roads and highways so on and so forth, but that hasn’t really impacted credit offtake – it hasn’t really kicked off in that sense private sector investment?Sharma: It hasn’t kicked off private sector investment, but you certainly have seen more activity in the construction space and construction equipment space coming from the focussed on roads and if we can kick that off for railways as well then it certainly adds to economic activity. I think there is a general expectation that the budget should probably have some announcements for uplifting the mood from a consumption perspective.The promise of reducing tax rates for instance – if part of that happen it could change the mood or if there is some initiative around – you may call it populism, but I think it important to get that done, because unlike Cyril – I think we don’t live in a black and white world. I don’t understand left of centre and right of centre. You have to do things which are pragmatic and inclusive and take the country forward.Q: Which means what things like farmer on waiver do you believe that that is on the card?Sharma: I think farm loan waiver creates the wrong habits and will actually encourage people defaulting on loans. I don’t think that is a good idea, but for instance encouraging low cost for housing and figuring out a way of accelerating low cost housing that could be great for the economy. It would meet the promise of housing for all, it would kick-start consumption. It would kick-start construction and that is a very employment intensive sector – so there is a bunch of thing that all of us expect will come from the Budget and that can change the mood.The other interesting thing to me actually in all of this is post-demonetisation – we all thought that okay we are going to because of the cash shortage – we are going to see a hit in sales and that the recovery will happen only slowly. I was just asking Harsh and I have been asking couple of other people as well – it’s interesting that the recovery is a little faster than what we would have anticipated. So it comes back to my core belief that Indians are the most adaptable race in the world. You throw something at them they will crib for a while, but then they will move on and say okay that the real world and let’s move and see how we make the best of it. We have not seen such an accelerated increase of digital in the 3 years that we have been usually focussed on it.I was mentioning yesterday debit card active on point of sale (POS) the kind of shift we saw in 3 years, we have seen in a month.Q: But necessity is the mother of invention and you have to make that?Sharma: Exactly, but the point is that even when you want to bring a change in an organisation some time you just hit the stick and say that this is not going to happen from tomorrow and then people adopt and change and move on. However, painful and hard it maybe you can see that big change to digital and that would dramatically change business opportunities. I totally will endorse what Arundhati was saying that if we look at for instance what happen to the consumer lending market in India and we looked at data on this – in the urban markets it used to be 40 percent formal lending, 60 percent informal lending and with the emergence of credit bureaus and availability of data that just change dramatically over the last decade.If digitisation goes through then today the small entrepreneurs the funding pattern is probably 20 percent formal, 80 percent informal – imagine what that would do – if that came into the formal sector. It would create opportunities for the financial services sector, but it will bring efficiency to those guys because their cost of funding is going to come down from 36 percent to maybe 10-13 percent whatever happens. I think there is some dramatic change that will come through, not necessarily because interest rates are coming down.Q: There is this big hope that we are going to see a dramatic cut in interest rates. Is that hope or are we likely to see this follow through?Sharma: I have stopped giving forecast because we live in such an uncertain world. On November 8 so many things came and hit you – who said Brexit was going to happen – who said we were going to get the US president that we got – who imagine demonetisation. I don’t know what up there tomorrow – so I am not giving you any predictions on the interest rates.Q: Your prediction on interest rates?Puri: Prediction of interest subject to other things being equal – so if inflation goes down, if as many deposits that have come to us if only 50 percent are withdrawn – if the commodity cycle doesn’t change the actual inflation – you will see some reduction in the first quarter.Q: Some reduction.Puri: When you start to say dramatic – its starts from you guy dramatic – then you create the expectation.Q: But the government is saying that?Puri: I am giving you a wider aspect I am talking about you guys everybody other than the bankers.Q: So everybody else on one side and the bankers on another side?Puri: It looks like that some time.Q: So all the twin meet or not.Puri: But the fact of the matter is the way the MCLR which is the marginal cost of funds are structured – if our deposit rates go down which is a function of money supply – I automatically reduce the interest rates – so I want to try once again with the media at least. This is a mathematical fact. So there is no question of what I do or what Arundhati does or what Shikha does. If the supply of money exceeds demand – we dropped the deposit rates and my cost of funds goes down. The drop will be dramatic or non-dramatic but it will be mathematical.Q: Would you like to add to that?Bhattacharya: No, what he says is exactly the thing the way it is and today huge liquidity, very little credit offtake – so obviously if you put those two together rates dropped.Q: Shikha just talked about how you believe that the recovery has been faster than what you anticipated initially, but give me a sense of what is the sense of consumption at this point of time and if I would ask you about a few levers that you believe whether the government can exercise to really kick things off from the consumption point of view?Mariwala: See if you look at post demonetisation I think your question is really to that – November was a bad month for all us and again within the country there have been regional variations. South almost normal, west okay, north and east are in a bad shape – wholesale in a bad shape, rural demand in a bad shape but modern trade big city retailer holding up. So everybody was down in the month of November. December I also expected much slow recovery but I just had a review meeting with my team and it look like we are getting back to normalcy much sooner – I don’t have the numbers yet, but it substantially better than November, which is a very good sign. What can the government do – I think ultimately it is a question of supplying money quickly into the system and the pace at which it is happening is much slower than the demand – that is one key I would say government can do and beyond that one other thing which I am little worried about is the goods and services tax (GST), because again it is a big reform and there will be some time when the GST is launched and the actual trade and the industry is able to adapt to GST and the short term disruption again should not impact business and all._PAGEBREAK_Q: So what is the expectation now realistically, because it seems like even if the legislation goes through in the Budget session perhaps April 1 is unlikely?Mariwala: It almost out of question yes.Q: Even if were to be a July rollout.Mariwala: July or September 1 these are two dates.Q: So what will then the transitional pain impact?Mariwala: One doesn’t know – if there is more time to that extent there is much more for the industry and trade to meet up with the challenges of GST – so at one level it is good thing that it is getting delayed, because on the back of demonetisation if this happened very soon it would added double whammy, but if there is all the laws and everything is clear and between that and actual launch of the GST there is a gap of 4-6 months and that gives enough time for the trade industry to cope up with the challenges of the change.Q: When we were having this conversation last year you were talking about how you hadn't really seen a pick up as far as private sector investment was concerned. That story really hasn't changed today. As you look into 2017 for private equity 2016 has been a good year, lots of exits as well including for KKR. But what do you see for 2017 as the opportunities and risks?Nayar: From the country's point of view the government has got to lay out a clear path for growth. That is the real thing. Things like demonetisation, I am in everyone's camp, it is great for the long run, leaving aside the short term inconvenience but the long term issues are how do you get the right vectors for growth from here. Now, if it is purely consumption lead we saw that in 2008 what happened, it leads to quick inflation and then rates go up and it is not sustainable. So, it has got to be investment lead and if it is investment lead private sector has to invest frankly, not just the government.How do you get that confidence and climate back, that is the think that at least people like us are watching because we only buy into private companies and if the promoters, entrepreneur is not enthused about investing then I think we are like the last succours of investing behind him. So, there is no point investing behind a promoter if he is not enthused about it. So, that is a big challenge for the government. I am not saying it is their fault. But how do you get the confidence back so that the Indian businesses invest in India is the number one thing. We got to watch for that.Q: Everyone is sort of talking about Budget 2017 as being this big stimulus Budget, that is what we are calling it here on CNBC-TV18. What would you like to see from Budget 2017?Nayar: You have got to see structural changes on the tax side.Q: A big radical cut in corporate taxes? Is it possible? The roadmap was for 25 percent, we haven't moved the needle.Nayar: There is enough fiscal gap out there that they can do a lot of things that they want to. It has got to be very focussed in getting the investment sentiment up. And my view is that they have got to do something for the capital markets desperately.Q: What for the capital market would you like to see?Nayar: I am not going to make a guess, but I am going to say stay at the conceptual level that if local savings don't come into capital markets you will keep depending on FIIs and FDIs. FDI reforms by the way have been fantastic. But you can't keep depending on foreign savings to come into India to build India. You have got to build local savings and you have got to have a framework of capital markets that enthuses them. We have talked about this every year. So, there is no magic out there. You have just got to implement a few things and government has still got a honeymoon for a few years because while all in all it might go up their credibility is high, the reforms at least in the point of bureaucracy, the responsiveness has come a long way. The work ethics and work culture are outstanding, we can talk about that. So, there is a lot that they could do and announce in this Budget that gets the sentiment.Q: The one thing that you would really like to see in Budget 2017?Nayar: Something which really promotes people to begin to start doing capital expenditure (capex) and of course consumption has to pick up. Without consumption there is no point doing more capex. We are already underutilised capacity and we don't have much pricing power. So, this is not one thing. As Aditya said you guys in the media make this one thing a big thing but there has got to be a series of saying that really come together and gives a framework of growth because we are at a juncture where we got to decide are we going to be consumption lead, are we investment lead, are we going to be driven by foreign savings or local savings, they have got to make up their mind.Q: Help the government make up its mind on what it should do in Budget 2017. What do you see as the key inflection points for the year ahead?Memani: I would think as Harsh said GST is a big inflection point. If we all believe that demonetisation is a big change my personal view is GST is 2x of that because it is so rationale. So, we are seeing very large structural changes which all of us believe give short term pain but give medium term to long term benefit. And most of the people logically are convinced about that. But what the government has to do behind these structural changes that if the fundamentally believe that if they are collecting Rs 8.5 crore as taxes and India's tax to GDP ratio is lingering between 10-11 percent if this is going to go up because of demonetisation if this is going to go up because of GST this year the government will have to back itself up and say yes, the tax to GDP ratio is going to go up. Yes, we are going to provide some incentives and we will use the buoyancy effect to meet our fiscal deficit which I think hitherto the government has been shy. So, that to me is a fundamental thing given when the election timing is. It will be much more populist from a consumer stand point. You are having the Budget in the first week of February, you have some very important state elections coming through. So, we have to expect which may not be bad because for investment to come consumption has to move up. So, the government has to provide relief.Q: So you think that relief will also be more from consumption prism?Memani: It will be, given what the political reality is, given who the stakeholders are.Q: So, income tax breaks so on and so forth?Memani: I don't know whether income tax rates could be lower. Lifting the slab rates from 2-2.5 lakhs to 4-5 lakhs reducing the low. I can't see higher rates of tax rate changing, doing that giving some corporate relief to bring 30 percent down to 28 percent saying that directionally we are travelling there. So, that is what has to happen.So, GST plus a Budget which gives a consumption stimulus so that the investment activity starts and obviously hopefully interest rates and other things will promote that. The third in my view they will have to back some sectors which will create employment and innovation.Q: So, like leather, textile, IT perhaps?Memani: It now has to go deeper into sectors and IT I completely agree with Vishal, the world is changing at such a rapid pace either because of technology changes or because of nationalism that unless we don't promote digital and innovation and what has happened in many ways will foster much greater and accelerate innovation. So, those things we will have to look at and change and finally I would say just from a tax standpoint the number of measures and reliefs that the government has given from a transfer pricing standpoint from APS standpoint and everything is pretty significant.So, the average person is still not feeling on the ground but from a corporate level the release that the government has given is much better. But you have GAAR coming which can have disruption, you have BEPS coming which can have impact. So, you are seeing globalisation impact because of the supply chains integrating around the world but at the same time you are seeing the government very focussed on trying to see how they can get relief going.Q: Since we are talking about the Budget trying to stimulate growth how much of the government's response also now needs to be with an eye on what is happening outside of India? Right now we are talking about stimulating growth inside of India. The challenges and the opportunities, the threat as well, deglobalisation, protectionism and so on and so forth how much of the Indian response now also try and counter that, the big global reset so to speak?Puri: If you take summary of what everybody is saying here fundamentally if you get throngs right then it is a bright future. So, if you see what did demonetisation do you take Harsh's point. If you get money back into what was not a digitised area and what was into remote you come back to the old growth rate. If you take what Rajiv is saying fundamentally is saying fundamentally whether jobs etc and I am saying don't write out demonetisation between taxes which they will get because they didn't get the money being returned. It will be a situation where when they have returned the money there are lot of people who are going to be liable for taxes. And if they can bet on what is going to come through there that is important and semi-urban and rural India if you can get light, electricity, water and technology out there it is a big uptick. You will have to depend more on India itself and go forward because the export lead model is gone but fortunately in India there are enough avenues if we get it right in terms of improving our efficiency and in terms of bringing about equality, in terms of removing the difficulty of doing business, putting money in the right places, I think we are still okay.Q: 2017, cautious or confident?Sikka: Confident.Bhattacharya: Confident.Shroff: Confident.Sharma: Optimistic.Mariwala: Cautiously optimistic.Nayar: Cautiously confident.Memani: I feel quite optimistic. It should get better.