Q: The Prime Minister’s clarion call to industry leaders at CII was that look I feel confident of being able to get growth back, but how is the question and I know that you have laid out this 10 point chart on what industry hopes to do. But given the fact that at this point in time according to the Reserve Bank of India’s own survey consumer sentiment is at a historic low at least the lowest recorded in 6 years, there is concerned about financial security, job security, private investment is anaemic, the last number that I have as far as banks are concerned they are still parking more than Rs 6 lakh crore with the RBI, so how do we start to get growth back? 

A: I think there is short-term and there is medium-term. In the short run the focus has to be life and livelihood and in that context whatever is needed for supporting life, protecting it both from virus as well as from loss of livelihood and of course livelihood itself should be the top priority and for that the CII view is we need to do whatever it takes to protect these two and that is really the immediate and short term.

Q: What is the whatever it takes Mr. Kotak, in the short-term what is the whatever it takes?

A: I am coming to do that, as we now move to Unlock 1.O and we gradually go towards unlocking, we are seeing in pockets significant pent-up demand actually manifesting itself. What we need to do is the next round of spending or support which we do should be timed around the time when post a pent-up demand increase we see that there could be some flagging off demand at that point of time. I believe therefore sequencing and having it properly timed is extremely important for getting the demand side sorted out.

Simultaneously, one of the other behavioural changes which is happening is as we are putting money in to the bank accounts of people which has been done, not many people are spending. A lot of people are conserving cash and that is a consumer behaviour change. Therefore only by putting money into the pockets of people does not mean that people go out and buy. It is about psychology, it is about consumer feeling comfortable and that is where really the issue is. It is as much a mind game as it is the real world game.            

Q: Let us address the real world game first, I will address the mind game in a bit. As far as stimulating demand is concerned and you talked about the sequencing and that is the messaging that has come in from the government as well that look we look at the next steps, once this unlock period is in some degree of stability we don’t know what quantum, we don’t know how this will be done. What nature of stimulation the government is looking at but do you believe that a cash transfer for instance is the way to go? What is the quantum that industry is now expecting in terms of the next steps to stimulate demand?

A: The cash transfer to the bottom of the pyramid is a fair way to go, because the impact is highest at the bottom of the pyramid. However, in addition to that there is demands from industries particularly with reference to jobs. Many industries from an economic point of view may need to tighten their cost structures. Therefore should there be potential job cuts, there has to be protection for people, therefore either government pays industry and those jobs continue or else if those jobs are lost there has to be a social security measure which the government may want to think about because the core to it is industry has to get more efficient and in the interim the friction with jobs is what we need to protect.

Q: Let us address that issue that you have raised, the possibility and the prospect of job losses because industry is possibly going to try and bring down cost as much as possible, but so far the government hasn’t stepped in the big demand even before this financial package that was announced was that the government should provide some sort of a safety net or the government should step in with some sort of a wage or salary support which hasn’t happened. So what leads to you believe that that is still a realistic expectation and what is the quantum that you believe is necessary?

A: Again you are going back to some of the basics. If you look at the fiscal deficit envisaged before COVID-19, it was centre plus states put together 6.50 percent of GDP. The current numbers estimated by economists are more like 11 to 12 percent of GDP, so we are already 5 percentage points higher than the original estimates and if I convert it in terms of the fiscal stimulus because that is the amount of the loss government is taking whether it is revenues or whether it is cost due to COVID is Rs 10 lakh crore that is 5 percent of 200 lakh crore of GDP. So Rs 10 lakh crore effectively is the pain which the government has taken because of COVID and protected the economy.

Now the question is beyond 11.50, how much more can we do and how relevant is it for us as a country to maintain the balance between fiscal deficit and macroeconomic stability. We are fine on the external front, but on the domestic front the numbers which are now talked about in terms of borrowings as the percentage of GDP, government borrowings, I think we are coming to a number now in excess of 8 percent. Therefore it is important for us to get the equilibrium right and there will be a lot of noise from various quarters for spend, therefore choosing the right spend and the right time is crucial.

Q: If I then hear what you were saying to me, you believe that given where we now find ourselves on the fiscal deficit, the fact that public debt to GDP is in the highest as far as the emerging markets are concerned, that you understand the constraints the government is dealing with and you believe or you realistically don’t really expect any big spending further from here on?

A: It depends on what we consider as big spending. Let me give the example of what government has done with MSME. Rs 3 lakh crore guarantee package and I think it is a great package. I believe it will get used by September and Rs 3 lakh crore is without putting any pressure on this year’s fiscal deficit because it is a guarantee. Now in reality over four years, not all of the Rs 3 lakh crore will be lost, there will be significant percentage of that money which will be paid back by the MSMEs, therefore the actual losses to the government will be a fraction of the Rs 3 lakh crore.

Further this loss if any will be spread out over four years, therefore a total of Rs 3 lakh crore of liquidity being made available to MSMEs today, but the fiscal pressure of that Zero in this year and probably whatever that number is spread over four years. So we need to think creatively as the government has done in the case of MSMEs package – provide the boost without disproportionately loading the fisc.

Q: So what could that creative way be and speaking of creative ways to deal with the fisc and need for additional spending that option of monetising the deficit and getting the Reserve Bank to do so where do you stand on that?

A: You are market person, therefore you fully understand the distinction between primary markets and secondary markets. There are two ways by which investors can buy paper. Number one is primary and number two is secondary. What we are talking about monetisation of deficit in the traditional sense which is you are talking about is primary buying of paper by RBI from the government. I do not think that is needed or advisable.

The current methodology where the RBI expands its balance sheet through open market operations (OMOs) is the appropriate way of the expanding the Reserve Bank’s balance sheet. Therefore the government of India places its paper through a public fair market auction on the market where investors buy the paper and thereafter the RBI provides open market operation facility and buys back some of that paper from the investors who have bought that paper. That is still a monetisation of the deficit because it is expansion of RBI’s balance sheet, but it is not a direct purchase by the RBI.

The problem with the direct purchase by the RBI in the primary market is there is no fair price discovery and number two the danger of this becoming a habit. Therefore from a discipline point of view continuing with the practice of a secondary market placement by the government and RBI expanding its balance sheet through the OMO is the much better way to monetise deficit.

Q: I want to now address the second point that you have raised and that was the mental game so to speak. Now one of the challenges that industry is going to have to grapple with is the crisis on the labour, you have seen migrant labour face a complete crisis of confidence, returned back, a- we don’t know what the implications will be of this reverse migration in the short to medium term – b – what do we do to ensure their return and do you believe that industry and government has failed them?                                                           

A: First of all in my life I have always considered migration to happen which is rural to urban because urban India offered a lot more opportunity and therefore people from villages and small towns aspirationally moved to urban India and cities. Over the years cities became overcrowded and the migrant labour a lot of them had to stay in slumps and chawls with poor living conditions.

Number two the jobs they have got are relatively in-secured and therefore many of them are day jobs and post COVID some of them lost their jobs overnight and to top it all the risk of the virus in cities has been much higher because you are staying in a slump or a chawl where a bathroom is used between thousand people and therefore with that additional medical risk and migrant has taken a call as an individual citizen of India that I am not ready to take this health risk, quality of life issue and insecurity of my job and I am much happier even if I make less income back in my village where I feel more secure, my health risk is lower and I don’t have to worry about quality of my relatively.

Migrant has taken a choice like every Indian has a right to just India has rightly got all Indian from overseas, this is a right by Indian in India and we must respect that. This is also an opportunity for us to redefine the rural urban rebalance and in the world of broadband connectivity if we can get skilling and health spending particularly in villages and towns of India at a speed over the next 6-12-18 months, we can actually create a much more balanced economic growth for India and this is our opportunity to do it, put money into villages.

Q: How realistic is that, you are talking about this reverse migration and being able to look at the distributed workforce and actually setting up workplaces in rural India. But giving the infrastructure, but giving the lack of private sector investment so far in large parts of rural India, how realistic is that over the next 6-12-18 months as you point out?

A: I would say spend on rural infrastructure, for that if we have a medium term challenge on the fiscal deficit, we are putting money into real assets. Think about e-medicine, think about e-health, setting up of health facilities, setting up of education facilities on a medium term basis. We have always under invested in some of these. We have always said we don’t have the money now, we will do it later.

The time is now, we need to redefine the rural-urban balance and instead of once again trying to hope and force migrant labour to come back into cities, we first need to ask the tough question. It is an economic decision of the migrant to come back, is corporate India and Indian business ready to improve the conditions of the work at which we expect the labour to come back or else my view is it is not easy to get them back unless we have a significantly better economic position for them to come into.