Consumption and investment boost to lead to economic growth: Keki Mistry, HDFC

As far as liquidity is concerned, there is enough liquidity in the system. But there is also a tremendous amount of risk averseness that needs to be tackled by RBI, says Keki Mistry, VC & CEO, HDFC. Excerpts from his interview with ETNOW.

What are you expecting from the Budget, in light of GDP growth hitting a five-year low? What can the finance minister do to propel growth into the economy?
My view is economic growth will come when consumption and investments pick up. When investments pick up, jobs get created, when jobs get created people get income and when they get income, they start spending that money which increases consumption in the economy and an increase in consumption and investments will lead to economic growth and and higher GDP numbers.

In my view, the budget will focus on three broad themes: the first theme will be revolving around job creation; the second theme will revolve around the rural economy and financial inclusion; the third theme will revolve around procedural issues -- how to increase the tax collection, improve compliance and get more people within the tax net and things like that.

Let us take each of these three separately. For job creation, you have to look at sectors which contribute to a lot of jobs and the obvious one that comes to mind is housing. Besides housing, there are sectors like manufacturing, NBFCs, the SME segment also. But housing is one sector which created a huge number of jobs in the economy.

What according to you can be done to try and resolve the challenges in the realty as well as housing space?
There are two challenges that the housing sector is facing. The first challenge is with regard to unsold inventory. There has been a huge build-up in unsold inventory, particularly in the big cities. The second challenge the housing sector faces is in terms of the number of projects which are stuck and where there is no progress, which are half done and where construction is not getting completed.

These are the two challenges that the housing sector is facing. There are different remedies for each of these issues. The first one is how to increase sales and tackle unsold inventories. Obviously the answer is we have to increase sales in the system. For sales to increase, five measure can be taken. The first measure which should be taken is with regard to the interest payable on a housing loan. For a long time now, the interest payable on the deduction in respect of the interest payable on a housing loan has been kept at Rs 200,000.

There was a brief period of time when this limit was enhanced by an additional Rs 50,000 provided the loan was taken within a given period of time. Given the state of the economy, given the need to boost sales, given inflation, there is definitely a case for increasing that tax limit to a significantly higher level. If the interest reduction could be increased from Rs 200,000 to Rs 300,000 or Rs 350,000, it would go a long way in increasing the demand for housing, increasing the sales in the economy which automatically will mean that the existing supply gets used up. If the existing supply starts getting used up, then more and more construction will happen and more jobs will get created.

Various industry experts suggest the need for coordinated effort from RBI and government to liquidate regulatory issues for the NBFC sector. What can we expect to hear from FM in this budget?
I am not too sure that this is something which would be part of a budget other than the fact that the finance minister can make a mention about the NBFC crisis and steps are being taken to tackle it. But to my mind, there are two things which need to be done but not necessarily in the budget. The first is that the regulatory framework for NBFCs has been strengthened by virtue of including NBFCs within the definition of non-performing loans. The way the non-performing loan circular is applicable to banks, it is now applicable to NBFCs also.

There is a need for strengthening the liquidity mechanism, the amount of liquidity that the NBFCs need to keep in the balance sheet. With a stronger regulatory environment, RBI needs to meet with the bankers and talk to them and tell them that the NBFC sector is much better. It is very closely regulated today and they should therefore be more willing or more open to lending money to NBFCs. After all NBFCs provide a very important role in the economy, they reach out to segments of the market which banks are not able to or are not willing to reach out to.

NBFCs need to get encouraged and the second thing which RBI could probably do is create a road map by which NBFCs over a period of time can get merged into banks or can convert themselves into banks. These are the two things that RBI can do but it is not a budget issue. The budget can probably make a passing mention but not really come out with any constructive solutions. As far as liquidity is concerned, there is enough liquidity in the system. It is just that there is a tremendous amount of risk averseness that needs to be tackled by RBI.

What could be done to address board risk governance in the NBFC space?
Risk averseness is a very important thing which needs to get addressed. It cannot get addressed in the budget itself. But slightly more lenient regulatory framework would help in removing the risk averseness which has set in. We have moved from a fairly easy regulatory environment of a few years ago to an extremely strict regulatory environment that needs to be moderated perhaps just a little bit. The other thing which needs to be done is just talking to the banks and convincing them that these sectors are well regulated and lending money to these sectors is not necessarily frought with that much risk.

A very important debate at this juncture is also about the fiscal space given the challenges that we are seeing on that front and the need to boost growth. Should the government choose to relax the fiscal deficit target for FY20?
In my personal view yes. Normally, I would have said that fiscal deficit is the number which should not get breached. But given what needs to be done in the economy, given the need to propel economic growth, given the need for government to spend money on infrastructure to create more jobs, it is important that even if the fiscal deficit is breached by 10, 20 basis points, I do not think the market will take that very negatively.

If the government does relax the fiscal target, what is the room that the RBI would then have with respect to cutting rates as there is also need to bring down the cost of capital?
The cost of capital has come down quite a bit in recent times because RBI has undertaken three rate cuts till now and even if there is a 10,20 basis points slip up in this fiscal deficit going forward, I do not think by itself, it is going to lead to any huge inflationary pressure simply by virtue of the fact that overall inflationary pressure in the economy will be subdued. Global inflation is low, there is a slowdown in growth and in that kind of environment unless you see a spike in oil prices or have a major monsoon failure, I do not see any inflationary pressure building up. In my view, RBI will have the room to cut one or maybe two times more in the coming few months.

Recently one has seen consumption slowdown and the investment cycle is yet to pick up. How should the government try and balance out both consumption and investment demand?
Consumption will come with job creation and job creation will come with investments. It is not the large companies necessarily which create jobs. Jobs in the economy are created by the middle and the SME segment and therefore their risk averseness needs to be taken away. Banks need to be encouraged to lend money to the SME segment and the SME segment will automatically create jobs. There are investment opportunities there. If SMEs create jobs, that those jobs will lead to income and income will lead to consumption. So both consumption and investments need to pick up.

You are speaking about the need for improving financial inclusion. What are your expectations on that front?
When I said financial inclusion, I meant that in the weaker segments of the economy, self-sustaining themes are available like for example microfinance companies. Microfinance companies provide funds to the weaker segments of the economy by virtue of which they are able to start their own little businesses leading to sustenance. The microfinance sector probably was one sector which needs some encouragement to automatically lead to financial inclusion.