GST may add 1-1.5% to GDP; NPA resolution plus pvt capex to add extra 1%: KV Kamath

New Development Bank is the bank set up by BRICS countries and Kamath is in India for second Annual General Meeting of the bank.

Globally too, economies are showing signs of improvement and more so the BRICS countries, says Kamath.

Talking about the bad loans, he said recognition of bad loans was the first step, which was successfully done by RBI. The second step is finding a resolution for the bad loans and lastly, capitalisation of banks, said Kamath, adding that currently, we are in the second stage. Finance Minister is setting some tough timelines to solve the issue which is very important, he said.

Once the resolution is done, there would be a need to restore the health of assets to put them into productive use, he said but first, a resolution is must to have a workable, viable entity.

On the GST front, he agreed with the experts that it would add 1 to 1.5 percent to the gross domestic product (GDP). Moreover, if NPA issues are resolved and private capex picks up then it would add more 1 percent to GDP.

Below is the verbatim transcript of the interview.

Latha: From your perch, you will be better able to judge global growth. Do you expect that year 2017 is going to see better global growth than in the past many years?

A: I think global economy is showing signs of improvement this year and within that subset the emerging markets are doing well and within the emerging market subset the BRICS countries are all showing good signs of improvement this year.

Latha: We appear to have come out of the demonetisation hiccup with minor injuries. How does economic growth look for you in the year ahead, the year that starts tomorrow?

A: We have come out of demonetisation and remonetisation. I would say that we have come out very well and this should allow for a clear track in the coming year and we should look at doing well. Of course the goods and service tax (GST) and other steps that the government has taken, all these together augurs well for the coming year in terms of growth.

Latha: Your own area - banking - that\'s been the one which has not been attended to. The bad loan issue is chocking the flow of funds and maybe growth. What would your advice be to the government in a way in which it should tackle it?

A: Resolution of bad loan, we have had this chat several times; basically you have to look at three contexts. One, recognition and the recognition part of it has been done and we have to thank the Reserve Bank of India for sitting at the table and getting banks to recognise the actual scenario, second, resolution and third, if there is any capitalisation or cleanup.

I would think that we are in the second stage now which is resolution and I suddenly see urgency. I heard the finance minister talk about the need to urgently move on resolution. He is setting some tough timelines and I would fully support that we need to have a time on programme to resolve assets. Once we have resolved, by resolution I mean what haircut the sponsor has to take, what the lender has to take and how does it all work out in terms of restoring the health of that asset put back to productive use. Thereafter you can think about what to do with that asset; keep it in the hands of bank or if there are buyers in whichever context to sell it off to those buyers, but we have to get to the next step of resolution so that you have a workable, viable entity.

Latha: Let me come to the larger issue of public sector banks. Now as an outsider how do you think the government should move on public sector banks? Is consolidation a way out generally how should they be made more efficient?

A: The government has taken a step in consolidating State Bank of India (SBI) or getting the subsidiaries of State Bank to consolidate with the parent. I think for the government as the majority owner to look at what could be done in the context of other banks. However, with the same things in mind in the sense what should be the size to drive this new economy forward and what would be the advantages from merger and creating a healthy institution.

Latha: Let us get to GST, you referred to it, it is a reality now. How does it change India's economy?

A: I think pandits have talked about it for a long time and the numbers out there were about 1 percent addition to growth, I think 1-1.50 percent I should say. We can, in due, course expect this to give a boost to our economic growth by about that number, but in the interim if we can get some other equations right, we talked about resolution of non-performing assets (NPAs) and putting assets back to productive use. I think that part of the economy and then if private sector gets into an investment mode into that part of the economy we could see growth go up by another percentage point or so. So, we should look for good tidings.

Latha: Yes, private capital expenditure has not been forthcoming, so that is why pandits have been looking at the government to boost economy. In that context, Pan Cards are going to be linked to Aadhar and then there is of course, GST as well. Do you think the government will be able to spend more simply because you expect India's tax to GDP ratio to finally surge? Do you generally see more tax compliance and more money with the government?

A: I have always talked about technology. So this is right up sweet spot of technology and I would actually say that link it back to the whole demonetisation process, the remonetisation process, the fillip it has given to digital banking which has, I would think, pushed the digital frame by about seven years. We would have taken seven more years to reach where we are now reaching, the intensity with which the banks are driving digital cash.

Now, all this, in a way connects; the digitalisation move, the use of Aadhar and other enablers into better compliance, as it were, systemic compliance which should lead to a better tax to GDP ratio in the near-term, not necessarily in the long run. So, this is something that is a game changer as I see it.

Latha: Actually, earlier, before we started this show, my colleague and I were talking about how this year has seen some seminal changes in the policy architecture in India, monetary policy being set by the monetary policy committee (MPC) not just by one governor and the GST council, a brave new federal experiment. Do you think all this is adding to a big reset of the Indian economy in a sustainable way?

A: Clearly yes, my answer is a big yes and I would add to that so that the picture is complete. The whole digital move that we just now talked about, all these three things point to a big reset of the Indian economic space as it were which should lead to a very optimistic year going ahead and along with some of the other developments in the country, we are looking for good growth in the coming years.

Latha: The defining point this year has been the political. We seem to be in for a stable polity for a longish period, as we were discussing before, 53 percent of India is now in National Democratic Party (NDA) ruled states and the NDA itself looks set for a longer innings in the centre. How does that change the game for the economy?

A: I would put it this way that in any country's context, a strong politics gives momentum to growth and indeed this government has been driving growth in a very significant way and the current context makes the position even stronger. And one should be significantly more optimistic in terms of growth going forward. So, the steps are very clear from 7.1, India should aim at getting to the next jump which is 8.1 and then getting growth to a higher paradigm will become even easier. I am sure government and the leaders will drive to this number.