Privatisation is one big way to unleash animal spirits: Manish Chokhani

The veteran investor in an interview with Hamsini Karthik and Vishal Chhabria talks about the forthcoming Union Budget, India's growth challenges

MANISH CHOKHANI, veteran investor and director of Enam Holdings, in an interview with Hamsini Karthik and Vishal Chhabria talks about the forthcoming Union Budget, India’s growth challenges and how some radical policy reforms can unleash animal spirits in the economy. Edited excerpts:
 
There’s a lot of buzz around reducing or doing away with capital gains tax on equities this Union Budget…
 
In a capital scarce economy, you must do things to incentivise people to invest. Right? Capital is mobile in the world. Unfortunately, in India you have two hurdles to jump as a global investor: First, you factor in 5-7 per cent annual cost on currency depreciation, and then have to suffer STT (securities transaction tax), DDT (dividend distribution tax), and capital gains taxes. This high cost of capital makes us uncompetitive and results in the vicious cycle of uncompetitive production and exports. We need a strong currency, low interest rates, and low and predictable taxes. What we have had is the exact opposite. We have to learn from China, Singapore, and others. In a capitalist and globalised world, you make money by maximising turnover and velocity. In India, we are still following the “colonial” model of trying to extract margins, tolls, and taxes without understanding the power of velocity and speed. I hope that structural changes are made and signalled in a powerful manner.

 

In terms of economic growth and given the health of India Inc, how close are we to a recession?
 
For the rest of the world, when you use the term recession, you mean that growth has gone into negative territory and GDP is shrinking. In India, we are so used to 8 per cent growth that when we see 5 per cent growth, it seems like a recession. But certainly, there is a massive slowdown in the economy for a variety of reasons.
 
Do you expect things to go worse from here before they get better?
 

A lot of the current slowdown has been caused by some deep reforms like the Real Estate (Regulation and Development) Act, or Rera. This got compounded by the blowing up of the non-banking financial companies sector. Also because of reforms like the GST regime under which the compliant people are becoming bigger, and less compliant are falling by the wayside. So industry after industry, you will find the trend of the compliant getting bigger and stronger. When large segments of society have to course-correct, the structural adjustment takes time.
 
How long should one wait for things to turn around?

 
Hopefully, we start seeing things reaching a tipping point soon. For instance, the money coming into Reliance Industries from Saudi Aramco and the QIP of Bharti Airtel has already rebooted the telecom sector. Resolution is through in Essar Steel and Bhushan Steel, so that sector seems to be making a comeback — and that is helping corporate-oriented banks as well. Some of these have started changing the mood.
 
I didn’t see such a big slowdown coming our way. It’s about whether the crisis will end for those feeling the pressure because of overleverage or them being less compliant. Also, unless we solve the financial sector crisis and the trust deficit, the economy may remain range-bound. The combination of tighter compliance and financial sector trust deficit is the problem to resolve.

 
In your talks with foreign investors, what’s their feedback on India?
 
India is still seen as the last big emerging economy of the world — that will become the third-largest economy of the world over the next decade. While we are crying over growth at 5 per cent, others will give an arm and a leg for that. The issue is that our economy is still too small and concentrated. We still resemble a colonial economy focused on margins and toll taxes, rather than a modern economy focused on speed, velocity and platform creation. Unless we can rapidly provide skills, jobs and upward social mobility to our youth —without demonising those who are successful — we cannot progress.

 
Can privatisation be a game changer?
 
Privatisation is surely one major way for the government to drive productivity, unleash animal spirits, and reduce its own interest burden. As much as 40 per cent of the government Budget goes into interest payments and it is always starved for resources to invest in essential infrastructure. When Suzuki got Maruti, the world thought India has arrived. Telecom licenses opened up the floodgates for private equity players and FDI and FII funds rushed into India. Major companies like Hindustan Zinc, IPCL, and VSNL got privatised and productivity and wealth multiplied manifold. India needs to get these kinds of events right and signal its economic philosophy is forward-thinking. If the privatisation of BPCL, Container Corporation, and others happens this year, the market will see the potential and rerate PSU stocks.