Q2 GDP: Fiscal deficit of 3.9% realistic, says Uday Kotak

The just released GDP data for the second quarter (July-September) shows that the growth has gone down to 4.5 per cent (the lowest in six years) from 5 per cent in the first quarter (April-June)

Uday Kotak, vice chairman and CEO of private sector Kotak Mahindra Bank is comfortable with some deviation in the targeted fiscal deficit from 3.3 per cent of the GDP to 3.5 per cent or 3.9 per cent in the fiscal year 2019-20.

"A fiscal deficit of 3.5-3.9 per cent is something we should be realistic about. It's not that I like fiscal profligacy but we have no option but to do it," Kotak told Business Today in an exclusive chat early this week.

Recently, the global credit rating agency Moody's had revised the India's credit outlook from stable to negative, citing slowdown in the economy, job losses, farm distress and the problems in the financial sector, which are also impacting the real sector. "A slightly higher fiscal deficit is priced in," says Kotak.

The just released GDP data for the second quarter (July-September) shows that the growth has gone down to 4.5 per cent (the lowest in six years) from 5 per cent in the first quarter (April-June). There are various estimates of GDP ending the fiscal with 5.5 to 6 per cent. Clearly, the Indian economy is in a slowdown mode. Former prime minister Manmohan Singh recently said that India is moving towards stagflation, that is, a state of high inflation and unemployment. Finance Minister Nirmala Sitharaman, who announced a slew of measures to prop up the economy earlier this year, said in the Parliament that the Indian economy is facing a slowdown but not a recession.

Experts still debate whether the slowdown is cyclical or structural. Kotak believes the world is going through some fundamental behavioural changes in human cycle that  is changing the pattern of demand and supply. "It's also applicable to India," said Kotak.

Kotak stresses that globally the traditional behaviour of owning a home and a car has been witnessing a change. India is not aloof to it."We are coming to terms with changing societal behaviour and nation state objectives against free markets," said Kotak.

Kotak complimented the government for encouraging private investment by cutting the corporate tax rate, which has brought a Rs 1.40-lakh crore bonanza for the corporate sector. "The reduction of corporate tax rate is a first supply side move to get the private investment back," said Kotak. For many years, India was disproportionately dependent on consumption driving the economic growth and not investments.  

On the demand side, Kotak believes the country needs more confidence-building measures. "We are dealing with a country that is coming to terms with different ways of doing business from what it had been doing in the past," said Kotak.

Meanwhile, the fiscal and monetary windows are narrowing. On the monetary side, the RBI has already reduced the repo rate by 135 basis points to 5.15 per cent. The retail inflation has also started inching up to 4 per cent that restricts further room for rate cuts. A window of 50 basis points could be available, but nothing more. Similarly, a big slippage on the fiscal deficit would attract the wrath of global rating agencies, which may downgrade India, leading to losses on the currency and investments. The cost of raising capital abroad would also go up.

However, the long-term India story appears intact. The clean-up drive in the financial sector and the way businesses were done earlier have been changing.

The 60-year old Kotak gave an analogy of a shirt wash. "There were parts of Indian business that  were like dirty white shirts. India is moving to a clean white shirt now. We have to ensure that in the current transition we stay careful and don't tear the shirt," said Kotak.

"That is the transition we need to have. The transition into clean white shirt is the new India," said Kotak.

Going forward, Kotak believes that the India will see a significant downward correction not just in the repo rate but also in actual interest rates. "I see interest rates moving downwards. The ultimate cost of money for savers and borrowers will come down," said Kotak.

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