Demonetisation: Govt may benefit up to Rs 100K cr, must consider tax cuts: Shah

Whatever disruption MFIs and SMEs have faced, they have enough fall-back reserves, Shah said, referring to how very few people live from hand to month. We think remonetisation is now crucial; the banking sector has gone through a huge amount of NPAs. This entire stress due to demonetisation maynot be more than Rs 40-50,000 crore for banks, he said.

The new year might be a good place to kick off tax rationalisation, he said, adding that he expects the government to spend on social programme. The government should benefit to the tune of Rs 100,000 crore from the demonetisation impact by way of additional taxes or in the form of currency won’t come back to RBI. This will give elbow room for government to cut taxes. Shah expects defence and infrastructure to be major themes.Below is the verbatim transcript of Rashesh Shah's interview to Ekta Batra & Prashant Nair.

Prashant: How are things looking as we wrap this year out and as we go into 2017? Are you hopeful that business wise 2017 will be better than 2016?

A: Yes. If you look at 2016 especially the second half, there was a lot of uncertainty, a lot of upheaval, a lot of unexpected things that happened.

As we enter 2017, from a business point of view, I do expect that the first quarter is still to be subdued because of all the changes that have happened but on the back of it, the coming three quarters after that, from April onwards we are fairly positive that the growth that has been there will come back.

However, the good thing is that the global changes, demonetisation has not changed the structural demand and supply balance in India. It just got slightly dislocated and we do expect that from April onwards, as the demand starts coming back again for credit products, for capital market products etc, we do not see a long-term damage that has been done, in fact on a long-term basis a lot of positives will happen for capital markets and for the formal financial sector because what is going to happen is a lot of informal activity will move from informal sector to the formal sector. Therefore, I would be cautious for the next three months but April onwards, on the business front, should be very positive.Ekta: Are you monitoring what is happening with the foreign institutional investors (FIIs) selling in the equity and the debt market as critically. Is it a concern? Has it raised some eyebrows and do you think that it could turnaround in 2017?

A: I think it will. We are seeing that a large part of the FII selling both in equities and bonds is largely a function of emerging market allocation and that has been largely a function of US interest rates going up, US currency strengthening and we do see that there have been headwinds for emerging markets as a whole. Last three years have not been good for emerging markets and especially the last quarter has not been very good for emerging markets. So in that India is also part of that but when I talk to investors, when we get the feedback, it continuously gets reinforced that amongst emerging markets India will still be a standout opportunity and a lot of people feel that this correction that has happened in the last few weeks and if the Q1 is subdued, the market will be very well poised for investors to take opportunities out of that. So a lot of investors are looking at this as an opportunity that is unfolding rather than permanently going away from India. I think they are reducing allocation to emerging market but India, they still expect to be invested and increase investments on long-term basis.Prashant: Corporate earnings haven't delivered for many years. What is your sense?

A: We should not see corporate earnings as a whole. There have been a lot of pockets that have done very well even in the last four-five years. I think FY17 being flat over FY16, will in a way also set up a good base for FY18 because we have seen earnings starting to come back and the current year has been, especially bad because exports also have taken a big hit. So even if you look at pharma and IT, which have been the growth areas earlier, even their growth has slowed down in this year. So from all counts, from the local market as well as from the international headwinds, the corporate earnings has got hit because of that but I see that as a positive because if the market has absorbed this, market has absorbed the events of 2016, the current slowdown that is there, a lot of investors have factored it in, it's now in the price and people are still looking for opportunities and partly it is also because in the world as well as in India, for investors there are not too many places to go; interest rates will come down, so maybe the bond market looks good but a lot of people believe that interest rates are only about 25-50 bps away from the bottom, so there is not a lot of place to hide in that, internationally there are very few countries where growth is there. India, we should remember that in rupee terms our GDP is doubling every six years and that GDP doubling every six years in rupee terms is leading to growth in consumption, growth in investments. So on that count on the medium to long-term, if I look at three-four months from now, a lot of investors are very positive.

Currently everybody is in a slightly wait and watch mode which is a good thing, this kind of phases are good for investors to reassess and reallocate their portfolio but I do not think there is any long-term change in the view on India for Indian investors as well as foreign investors, in fact for Indian investors the kind of flows in mutual fund that we are seeing especially through systematic investment plans (SIPs), our estimate now is that SIPs get about Rs 35,000-40,000 crore a year as regular steady inflows coming into equity mutual funds and that is very positive for India.    

Prashant: What is your sense on non banking financial companies (NBFC) space as we go into 2017?

A: Whenever you have uncertainty like this, there will obviously be caution from investors but the good news is that when we are seeing -- it is different for different segments like in the microfinance segment collections are still about 80-85 percent of the normal, which means only 10-15 percent of the borrowers are not able to meet the regular payment because of this disruption.

However, the small and medium enterprise (SME) sector is currently saying about 95 to 97 percent of the normal. So there has not been a large scale disruption because what we have seen with a lot of our customers that they have cushion for three-six months, so any disruption which is three-six months to their business or their underlying cash flows, they have enough fallback reserves etc that they can easily access because very few people live completely hand-to-mouth especially people in the SME sector, corporate sector, everybody has reserves, everybody has some liquidity cushion. So if the business goes down by 8-10 percent for a couple of months, they are able to still sustain the equated monthly installments (EMIs) and all of that. So as long as this entire sales is only for couple of months and that is what our expectation is because we think the remonetisation, which is now crucial; demonetisation is over but the business will be back to normal for all the customers like SMEs and others is when the remonetisation is complete and we expect remonetisation to be over by end of January.

So a couple of months of disruption, most people have absorbed, we are not seeing a huge amount of stress on that and also the banking sector has gone through a huge amount of NPA like corporate stressed account have been almost 8 lakh crore. This entire stress due to demonetisation to SME sector and maybe microfinance, when you add up the numbers, it may not be more than about Rs 40,000-50,000 crore. So it's a much smaller disruption as compared to what we have seen for the last five years for the corporate NPAs that have happened. I think banks and NBFCs will absorb two-three months of little bit collections, which are below the norm and I do not see large scale destruction on the portfolios.

The other thing that will happen is growth has slowed down; obviously the disbursements are now about 70-75 percent of the normal, so almost every NBFC and bank, the credit disbursements are down and that will also continue till January-February. So we might see three-four months of growth in disbursements going away and only after April onwards will the normal disbursements come back. So there might be a slowdown in growth and there might be a bit of marginal uptick in so-called NPAs but no real deterioration in the portfolio that we are seeing.

Ekta: In that context what is your expectation from Budget of 2017. It is possibly going to coincide with the fact that we will still be suffering from the demonetisation effects. So in that sense are you expecting something a little more populist or maybe something which could focus on cutting tax rates to become globally competitive in light of Trump possibly doing the same?

A: If you look at the finance minister has been saying, I think almost everybody expecting that some reduction in tax rates both corporate and individual will happen. I do expect that individual tax rates will come down at the lower end especially for the salaried and the middleclass; there may not be a need to cut taxes at the upper end and also corporate taxes, anyway this government has shown a path for bringing it down to 25 percent, so this might be a good year to start the process of gradually bringing down the corporate tax rate. So yes, I would expect taxation rationalisation. I also expect them to spend some on social programme, maybe something like minimum basic income or something like that and the government should benefit about Rs 100,000 crore to Rs 120,000 crore from demonetisation impact either by way of additional taxes they will collect or the extent that that amount of currency will not come back to RBI and RBI may pass it on to the government.

So I think that Rs 100,000-120,000 crore, if it comes through, will give the government a lot of elbowroom to cut taxes as well as implement some social programme. I am also hoping that government embarks on a very large investment programme mainly in infrastructure and defence because defence and infrastructure can kick-start the slow capex that we have been seeing. So these are the three areas that I would expect government to act very strongly.