The turnaround in the economy is fairly evident; with interest rate review and reforms in place, it may grow at around 5.7-5.8% in 2014-15, Rana Kapoor, founder, MD and CEO, Yes Bank, tells HT. Excerpts from an interview:
Do you see signs of turnaround in the economy?
The growth drivers seem to be falling in place. Retail inflation is falling rapidly and is near to the January 2016 target set by the Reserve Bank. From the overall reforms standpoint, the momentum seems to be fairly good. An interest rate cut, which I expect the RBI to announce in early 2015, will provide a tremendous boost to the overall atmospherics of reforms and business confidence for growth. The turnaround in the economy cannot happen just by reforms. We need a lot of capital and credit injection at more palatable pricing levels.
Do you expect the RBI to cut rates in its December policy review?
My assessment is the RBI will like to see overall numbers look firmer into the new year, particularly the fourth quarter. It will wait a little longer to see there is more consistency in inflation rates.
To what extent should the cost of capital come down to boost investment?
Anything less than a percentage point is not going to be significant. A 0.25 percentage point cut will not be material in the current context. Given the fact that we are the only economy that is growing in the world, reduction in rates has to be meaningful. A one percentage point cut is what is warranted initially and another one percentage point cut towards the middle of the year.
Interest rate reduction is a critical factor in future decision-making. There is practically no greenfield project being undertaken today. Several brownfield projects are stuck. First and foremost, corporates need to get their house in order. Bank credit is growing at below 10%. The economy needs at least 15-16% credit growth to be able to grow at a respectable level.
What according to you will be India’s GDP growth in 2014-15?
For the year as a whole, don’t be surprised if the economy grows at 5.7-5.8%. The turnaround is fairly evident. Business confidence and actual order book positions are probably at their best in the last three years. If a few things happen over the next four-and-a-half months such as the interest rate review, and if we continue to reform, it is likely that we may see 6.5% in 2015-16.
Which are the reform measures that need immediate push?
Overhauling the tax structure is one of the most important ones. The Goods and Services Tax (GST) by most estimates will add about 1.5% to GDP over a period of time.
GST also helps in reducing the cost of production. So, it is also an inflation solution. The second thing is the Land Acquisition Bill, distinctly that needs to be reworked. The third issue is labour and there is a fair amount of visibility of what needs to be done. We also need transparent mechanisms for allocation of natural resources. Besides, once FDI limit in insurance and pension is hiked, the pool of long-term funds available for long-gestation infrastructure projects gets augmented significantly.
Do you plan to float a joint venture for insurance business?
Unlikely. We are of the view that the business of banking need to be ring-fenced from capital consumptive businesses. The global crisis has taught major lessons that universal banking is not as attractive as it was believed to be in the past. I would rather use the capital of the bank to re-invest in the core businesses of the bank.
Are there other areas that you plan to diversify?
There are other related businesses, which are not so capital demanding such as Internet broking. We have started retail Internet broking business recently. We will also possibly look at another area, which is mutual funds. After being hammered for the last few years, the mutual funds sector is now in a sweet spot. We may set up an asset management company as a subsidiary of Yes Bank, say by 2015-16.