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Expect govt to undertake deep reforms in land, labour and capital: Rashesh Shah

‘It will be a big deal if fiscal deficit goes up by 10%’

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Last Updated: May 13, 2020, 04.25 PM IST
Expect govt to provide relief via credit guarantees to banks: Rashesh Shah
Expect govt to provide relief via credit guarantees to banks: Rashesh Shah
In every country in the world, insurance and pension are the real source of long-term capital, says CEO & Chairman, Edelweiss Group.

What is it that you are expecting from the Finance Minister and what is your reaction to the big economic stimulus?
As we have seen very often, in India it takes time for things to happen but they happen in a fairly big way. So the headline number Rs 20 lakh crore is very positive. It will have a big impact not only on the markets but the economy as a whole. I do not think anybody was expecting anything more than Rs 5-6 lakh crore as a stimulus. Even if you make adjustments, it is still a fairly large and impactful package. As you very correctly said, the details are important but with this, most of the large issues will get addressed.

Along with this, he announced the focus on reforms because the stimulus package is only to handle the pandemic issue but this is also a great opportunity to undertake some deep reforms that India has been in need of for quite some time and I think this pandemic gives the government the political capital, the room and the sense of urgency to get those reforms done. I would look at the qualitative part, which is mainly focussed on reforms.

Given our tight fiscal position, do you think it would be imperative to perhaps see some sort of a hike in taxes in some of the segments or RBI’s intervention to monetise the deficit?
I think it will be a combination of things. I do not think there is only one single idea or only a single bullet the government can use. They will keep an eye on the cap on the fiscal deficit. A lot of the economies believe that the central government fiscal deficit can go up to maybe 8% to 9% but anything breaching 10% in all will be a big deal. So the government will try to be careful not to breach that. I think they will also look at asset sales like real estate owned by a lot of government companies. They will use that and they will also use a lot of credit guarantee.

So even if they give Rs 3 lakh crore credit guarantee to banks, the real impact on government finances over four years will be not more than Rs 40,000-50,000 crore. By taking a four-year hit of Rs 40,000-50,000 crore, they can do a 3 lakh crore stimulus via the banking systems. So it will be via banks by providing them credit guarantee for MSME loans. It will be through RBI monetising part of that, through asset sales and through a lot of other means. The government will be creative in doing that. But yes, they will keep some cap on how much the total fiscal deficit will be.

The Prime Minister in his speech used the word aatm nirbhar. What do you think could be the changes announced and what do you think is the need of the hour in terms of a policy tweak?
Absolutely. The last time we had a real big existential crisis was in 1991 when we had the balance of payment crisis. After that we have had small mini crises but it has never been existential. We had all taken for granted that a 5-6% GDP growth rate or the India story is all intact and there was a sense of comfort and complacency that had come in. I think Covid has taken away that sense of comfort and complacency for everybody. We are starting to sense another sense of urgency around the real reform and I do believe that 2021 could be equal to 1991 for India from the changes in our economy point of view.

I think we need reform in two areas. What we did in 1991 was we reformed the market but we did not reform the input market like land, labour and capital. So I think the three areas where deep reforms can happen would be land, labour and capital. On land, we know the issue is fairly clear: There are a lot of reforms that the centre and the state have to work on together. When this government came to power in 2014, they tried to do some land reforms but there was a strong pushback. This could be a good opportunity to undertake those.

On the labour reforms, we have already seen that a few states have started taking the lead. Uttar Pradesh and MP have realised, to attract global investment or even to attract Indian investment, we will have to ease off on lot of the old rules which have been there.

The third one would be on the capital side, which is our entire financial system where we need the bank, the bond market, the capital market funds, global funds coming in and insurance needs opening up because insurance is one area which can provide really long-term capital. In every country in the world, insurance and pension are the real source of long-term capital. As we saw recently, mutual funds also cannot truly provide long-term capital to the economy. So there could be a lot of reforms on insurance and pension to really revive the bond market and the long-term availability of capital in India. So I would expect real reforms in these three areas.

Do you think this is that bazooka or omega moment which is going to completely put a floor to investment sentiment or do you think because the nature of the problem at hand is so unique, at this juncture, we will have no choice but to align to the world markets and may be underperform?
Maybe and maybe not. The markets will be driven by a lot of factors but what you are saying is right. Whatever the government and the RBI does in the short term or the next three months, what they need to address is the issue of liquidity and cash flow. We have this very paradoxical situation where there is a lot of liquidity with banks but it is not flowing into the economy. So how do we convert liquidity into credit flow? They can do that by providing credit guarantee to banks so that banks can take risk.

Also in India, it is not only the risk to banks; the risk to the bankers also has to be mitigated. Allowing bankers to make genuinely honest decisions even if they go wrong and creating that environment will be very important. In the next three months, the most important thing will be liquidity and credit flow in the economy. After that will be reviving the consumption and for that FMCG, housing and auto will be an important part. We have to focus on consumption and only after that do we have to focus on investments because investments will follow consumption.

The India story is a consumption story and consumption has stagnated. So we need to get that started. The priority for the government in using whatever stimulus they have should be to first get the credit going and the cash flow going and make sure there is cash in the hands of people. Then make sure they spend it; so create incentive for real estate, for auto so that people can spend including cut down GST on FMCG goods so that FMCG consumption can pick up. After that they can create an environment for investment because investments will then happen.

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