Pankaj Patel, President, FICCI, and Chairman & MD, Zydus Cadila told The Sunday Guardian that the significant reduction of interest rates by banks is one of its own kind which would play a key role in reviving the demand in economy. He also believes that the contraction in demand, especially caused by demonetisation, is a short-term phenomenon which would normalise in the next two months. Excerpts:
Q: Demonetisation has resulted in a significant loss of demand for many industries. How are businesses, small and big, looking at this move? And how deep is this demand crisis?
A: The view of the industries largely is that demonetisation is indeed a long term gain. This is how businesses are viewing it. We agree that there are sectors in the economy which have been hit harder with lower demand, but I do not see it (demand crisis) prolonging for long. We believe that this will ease out in due course of time. One of the things that has happened is the significant rate cuts by banks. A 1% reduction in interest rates at one go has not happened in recent history. This reduction would definitely help demand of retail loans going up which would ultimately lead to more spending by the people, thus helping demand to go up. I believe that the demand crisis might exist for the next couple of months and after that, things would move towards normalisation. That is how things are going to pan out.
Q: India’s manufacturing sector is believed to be operating at about 65% of its production capacity. Does that mean that demand for loans for expanding capacities (further) is not going to happen soon?
A: No industry works on 100% capacity. Normally industries work between 70-80% at the maximum, after which there is a need for additional build-up in their working capacities. So as the demand starts picking up to the level of exhausting these existing spare capacities, the demand for investment loans from the industries would kick in. Right now, lower rate of interest can bring down industries’ cost of operations. They do have requirement for working capital loans. On top of it, a lot of projects, particularly the capital intensive ones, which had issues with viability because of high rate of interest, are also expected to become viable. The lower rate of interest actually helps industries to cope up with the (challenging) business environment.
Q: The RBI has revised down it estimates for GDP growth for the running financial year to 7.1%. What is your assessment of GDP growth for this year? How much toll does this demand crisis have on this year’s economic growth?
A: As I said that after a couple of months, this demand contraction would start normalising towards better and we would see growth happening thereafter. The demand for retail loans is expected to pick-up which would generate enough demand. (After demonetisation) FICCI has not estimated the quantum of growth for this year, but we would shortly be coming out with our assessment of the same.
Q: What do you expect from the RBI’s next Monetary Policy Meet?
A: I think that we as a country have to become globally competitive and for that the interest rate (charged to industries) should settle around 7%. This rate of interest would be the kind of a level playing field for our businesses.
Q: Since you come from a pharma background, how do you see the Indian pharma sector doing in 2017. Indian pharmaceutical companies are being frequently arraigned by European and American regulators on quality issues. How would you react to that?
A: The Indian pharmaceutical industry would continue to grow. We would see around 15% growth happening in that sector mainly driven by US, Indian and demand emanating from other emerging markets. The segments of industry which would see significant growth would be bio-similars.
And as regards regulatory challenges, I do not think that we (Indian pharma companies) are being unduly harassed by Western regulators. Such challenges are part of the growth process. Regulatory actions are aimed at improving upon things and we take it in that spirit.
Q: When do you see the GST actually kicking in?
A: On GST, most of the major issues have already being agreed upon. The issue regarding administrative control over assesses is taking long. The GST can happen anytime from now to September 2017. We think that it should happen as soon as possible. The industry is very supportive of the GST move as it would lead to more tax compliance and would provide a significant fillip to growth. But the industry would need some time to understand the practical aspects of GST. We would need at least a few months to adapt to the requirement of the GST law and its attendant regulations.
Q: Banks have taken a rather too aggressive call to cut interest rates. Would it work, especially when many public sector banks are still battling with NPAs?
A: First of all, a huge amount of money is deposited with the banks. These are at lower cost. So banks’ cost of money has come down and for them to pass on this benefit to retail borrowers is indeed a wise step. As regards NPAs, retail loans have never been in the NPA’s category; likewise housing does not figure at all in banks’ NPAs which explains the banks cutting lending rates for buying a house etc. by about 1%. It would ease out the EMI burden on the common man. It would help the economy in terms of higher demand.