‘India is getting back to speed. We had merely taken our foot off the accelerator’
Debashis Basu/ Sucheta Dalal (MLD): The last time we had met, in February, you were quite bullish about the economy, in contrast to the general gloom and doom. You have been proved right. What is your sense now?
KV Kamath (KVK): I believe the India story is intact. What has happened in Japan and South East Asia, and then China, is valid for India too. And that is, once structural change happens, it is difficult to reverse it, unless there is a major shock. We’re getting back to speed as it were. Last year, we took our legs off the accelerator; we didn’t really brake. Clearly, we’re back onto 7%-7.5% target for the year. It should then be easy to take up to whatever the Government wants —9%-10%.
MLD: What should happen to take us to a higher growth path?
KVK: Looking around the world, I would have wished for lower interest rates. I’ll benchmark two countries—Thailand and The Philippines. In Thailand, just a few years back, the exchange rate was same as ours. It’s 33 baht to a dollar today. I am not saying the rupee should be 33. I’m saying that’s an interesting benchmark to look at. The interest rates in Thailand are 4%-6%. Interest rates are out of skew in India, primarily because the bond market is worried about how the deficit would be funded. This is because the government is not articulating the wealth we have. Look at this way. That’s a simple yardstick, Rs15 lakh crore listed value of government companies. ...Cash balance of PSU companies with banks is Rs3,00,000 crore, adding somewhere around Rs60,000 crore a year. Dividend payout ratio is 25%. Nobody will then talk of deficit. You don’t have to actually release, say very forcefully— this is available. It is a fact that the poor are asked for collateral and the rich get away with no collateral. This will probably have a solitary impact on interest rates.
MLD: On the other hand, if you really measure inflation properly, is it really reflective of the prices?
KVK: Have we as a nation done what is required to bring that inflation rate down? For example, we are letting sugar prices get out of hand. The problem is not now; it will come six months from now. What have we done about it? Here, proactive action was required. We are being reactive.
MLD: But that’s not going to change, is it? It’s a government attitude and I don’t think it is going to change.
KVK: No, it’s not going to change.
MLD: So, ideally we should have 3% inflation and maybe 2% real interest rates, adding to 5% nominal interest.
KVK: Yes, 5%-6% would be ideal.
MLD: What are the other key factors that would determine our future?
KVK: One important issue is how China handles its economy. I am not believing the China story this time for certain. I did not believe it in 2000-2002 when they had huge bad loans. But they managed it. This time again nobody is clear as to who’s going to pay for the subsidies being given to get rural China buy. Whether it is banks or industrial companies or government direct intervention, it’s not very clear. Looks like ultimately it’s the banks which will take the hit. They will try another cleaning-up exercise down the line, like they did last time. Last time, they were running surpluses. Now, with this sort of pump-priming against the backdrop of budget deficit, nobody knows that they will do. What is happening is very opaque.
MLD: You are just back from a trip to the US. What were your observations?
KVK: American bankers are extremely wary of what’s happening in the US. I have not seen such pessimism at all. I thought that the worst is over and what happens next (would be) a slow return to growth. They have bad loans and they of course, know what to do. They have handled bad loans in the past. But somebody told me that of the 8,000 banks in the US, 1000 banks, that is 12%, have commercial real estate exposure equal to five times their tier1 capital. These are all suspect. All it needs is 20% of these to go bad for that entire capital to be wiped out. The number of banks that may go down is the issue being raised and what does it do to the whole system? If China and the US as growth engines come under pressure, what happens? We are fairly insulated because we are still by and large domestic. But we are getting globalised more and more by the day. For the moment, though, the prognosis seems to be we are going strong domestically. But if China and US both have problems, sentiment will get hit very badly.