‘Implementation of GST, subsidy reform are vital for recovery’

The banking sector will mend its balance sheets in the next two years before it starts lending again. They have to recover NPAs ruthlessly, says Sanjeev Prasad, Senior Executive Director & Co-Head, Kotak Institutional Equities.

Prasad, an IIT Delhi and IIM Calcutta alumnus, shares his insights on macroeconomic issues in the current scenario.

What deficit containment measures do you expect from the new Government?

Current account deficit is not much of a problem due to the measures taken by the RBI. With oil prices at $115 a barrel, we expect CAD to be at $40 billion or 1.9 per cent of GDP this year. The CAD goes up $1.1 billion for every dollar rise in crude oil prices. 

Anything under 2.5 per cent of GDP is manageable, given that capital inflows of $50- 60 billion is expected this fiscal.

We need a medium-term roadmap on tax and subsidies for fiscal consolidation. The standalone fiscal deficit for FY15 will not look good and we estimate it to be about 4.6 per cent of the GDP with 14-15 per cent growth in tax collection and higher subsidy burden.

How long will the economy take to recover?

Two years of 6-7 per cent GDP growth is required.

If the fiscal deficit is fixed in the next 18 months, interest rates will come down, as the Government will have to borrow less. Then, introduction of GST and subsidy reforms through price increases or better targeting of subsidies will ease the situation further.

Finally, if the investment climate improves by easing the process of land acquisition and labour laws, besides expediting approvals for industry, growth will be back. However, this will not happen overnight.

How does one tackle land acquisition issues given extent of pending litigations?

States have to compulsorily digitise their land records. Karnataka and Gujarat have done that. This will ensure clarity on who owns the land and make the process easy. 

Will not simultaneous implementation of GST, Companies Act, Basel III (for banks) and IFRS accounting standards be a hindrance?

No, all are required in their respective areas as all put together increase transparency. GST will ease paperwork, inter-State movement of goods and result in an additional benefit of 70 basis points to the tax to GDP ratio, which is currently at 10 per cent. Governance issues will be addressed by the Companies Act, bank solvency by Basel-III and the quality of financial statements by IFRS.

Our tax net is quite small…

Eventually, there is a need to move to lower tax rates which will remove the incentive to evade. Black money generation has to be tracked. The two most common sources of hoarding are gold and real estate. There should be a domestic tax on gold and land records have to be made public. Further, electronic transfer of funds should be encouraged as it creates an audit trail.

Where are the jobs going to be generated?

Every year about 20 million people will enter the job market for the next 10-15 years and about 60-70 per cent or about 12-14 million new jobs would be available for them. 

But the manufacturing sector will go in for labour intensive processes only if labour laws are set right, otherwise mechanisation will take over. Technical education and skills have to be given importance.

Do banks still retain the appetite to lend given the high NPA levels and the consequent ‘go-slow’ attitude?

The banking sector will mend its balance-sheet in the next two years before it starts lending again. They have to recover NPAs. The 13-14 per cent credit growth expected will come more from retail lending. Banks have become more diligent in lending to infrastructure and are doing so only if the project viability and approvals are in place.

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