Where are we today on a scale of 1 to 10, assuming one being the early lockdown months and 10 being the pre-Covid times, though we were in a slowdown already?
Sanjiv Bajaj: It is tough to put a number, especially because many sectors are recovering quite well, some are not. I would say overall, and you’re right even pre-Covid things were slower in the economy, compared to that I would say that we are at about 7 on average, but 7 on that slower (pre-Covid) number.
The important thing is that many sectors have started to recover quite well and they’re between 80 and 90% of pre-Covid levels but there are a few sectors we know them all—airline, travel, hospitality and a few others that are suffering a lot more and they are also equally responsible for the economy staying a little slow.
Also, let’s keep in mind that the informal sector, and it’s difficult to gauge what’s the impact, but we know it impacts everything from consumption to new investments. They were hammered in this period, understandably and that recovery will take a lot more time.
If I was to put the same question to you from a Bajaj Finance perspective. The Q3 earnings note said – B2C, SME, Rural B2C, Mortgages businesses were at 81% of last year’s disbursements. What is that missing 20%? Because that would offer some insight into which part of the economy is still not feeling the confidence.
Sanjiv Bajaj: That is really the bottom 20% of people that we used to approve (for loans) in the past. A lot of that is unsecured loans, and it is also in certain geographies where we see the continued impact of the lockdown and where business is still slow. So that’s where the bottom 20% is. But that is also improving now month on month and hence, I think first quarter of the next financial year, we (Bajaj Finance) should be back to what things were pre-Covid.
What does it tell us about confidence, about consumer confidence to borrow and spend, and for SME businesses, the distress that prompts them to borrow.
Sanjiv Bajaj: I think that’s a great question and in many ways for at least certain segments of the economy and consumption, we end up being a reasonably decent barometer.
On the personal consumption side, I believe that most consumers today are at about pre-Covid levels. What they are not certain about yet is, going forward for the next, 12, 24-36 months how will growth take place in their companies? Where will jobs go? They are hence, buying more than what they were buying in the first six months of the lockdown but they are not opening their purses fully. There is another hidden potential there – a lot of our consumers who are middle class and above, in the first six-eight months of the lockdown (they) have not spent a lot of their money. As long as they get the confidence that their jobs are where they are, and it’s not only to do with Covid, it’s a lot to do with work from home and what that does to the nature of jobs. A lot of that is changing, it doesn’t mean it will change overnight but it will change in the coming years. So, people are a little concerned, but as far as the impact of Covid is concerned, I think on the consumer side that is well behind them. We have to see what the government does, what private sector does to give them confidence to spend more.
As far as the SME sector is concerned, I think the government and RBI did a great job with the liquidity support and with the government announcing that it will take the hit on the first set of losses. This has basically helped a very large section of MSMEs to stay afloat otherwise they would have gone under. So, they are now very much afloat, their noses above the water, they are breathing – but we now need to help them with the next stage which is to grow. That’s where they are looking for signs in the economy, they’re looking for what comes in this budget, if that aids them with greater growth then that will benefit them. With the informal economy, we don’t deal in that (space) but as I mentioned to you, I think that’s in all kinds of trouble and that will have to play through and it will have its negative impact.
What then is the biggest challenge that this economy is facing in the near term? Would you say it would be boosting consumption? Would you say it would be job recovery, though, there has been some recovery in the last few months.
Sanjiv Bajaj: I would say that this budget should work on a two-prong manner. The first is, as a typical budget what’s required for the next 12 months, but more importantly signals of what the government can do and will do for the next three years.
Let’s take each one of them. So the first is, you’re going to see between 8 to 10% growth in the GDP in the next year (FY22) given the base effect of this year. What we would like is for the government to continue some of the benefits to the lower-end income segment of this country, so to MSMEs and the lowest end of consumers, continue with the food support to the poor, so that you take care of some of those basics. They’re not out of the woods yet. Some of the support that the government has given in terms of employee contribution on hiring new people, these were for smaller industries—they were for employees up to Rs 25,000 salaries a month, increase that to Rs 50,000 so that you get the wheels of the engine running again. So, these would be for the short term. But I think that our challenge is that after next year of 8 to 10% growth, what happens in FY23 and FY24? We have the time to plan for that and to make sure we have that same growth trajectory and we don’t fall down to 4, 5-6% growth that many economists are worried of. For that I think from the government point of view, they will have to stimulate growth for some point of time. Private sector has come back to 80-90% of pre-Covid but they still sit on some idle capacity because that existed in the earlier year too, as we talked about, when the economy was slow. So, the government will have to support with investments, and I think investments in infrastructure, on the health side and on education – some of these can have a multiplier effect on the economy in the coming years.
Divestment – after all, the government needs money. You will see some amount of cut in the fiscal deficit because this year was a crazy year, but we hope that the government will look at this as more of a three-year roadmap for fiscal deficit to come back within prudent numbers and signal that it continue to support (the economy) in this interim period. Hopefully over a three-year period you need less and less support because then the private sector and other engines of the economy will start running.
You’re mostly advocating efforts in the budget that speak towards medium and longer term stimulus, right? Like infrastructure, health care—these things don’t show up in six months or eight months. You don’t expect any immediate consumption boost, besides the continuation of some of the policies put in place during the Covid period.
Sanjiv Bajaj: I don’t expect it because I don’t think they have too much of bandwidth to do that. I do hope that for the sectors that we talked about, which are really doing badly, they get some amount of support over there but I know that the government is also limited in what they can do. So, if at this point of time, they start investments in the medium to long term initiatives, that helps; beyond maintaining what I already talked about.
And, for us to pursue very strong divestment, they must look at creating a bank holding structure or whatever other sensible means, so that other than those two-three strategic PSBs, which they would want to hold majority control in, talk about the fact that you will go down below 50% in the rest. That will help improve valuations. So, there are many signals that the government can do, of course you have to walk the talk after that but there are many signals that the government can do as well.
For example, in China people talk about projects from signing to production, happening in 8 – 10 months. Why can’t we pick five projects at a national level, monitor it there and see that at least from 0 to 24 months we can take them to production, so that we can tell the world that come to India, this is the place to make for the world. It helps us with our self-reliant or Atmanirbhar India, but more importantly the world will see that you’re able to walk your talk. That’s very important now because that’s a huge opportunity for us.
Can I argue that with the PLI scheme or the national infrastructure pipeline, the government seems to have sent out these signals earlier as well. The fear right now is that any further investment from the private sector may depend on consumption going up and therefore the need for some immediate stimulus towards consumption. Now whether that comes via personal income tax change or something else — do you think that that’s something that should be a key element of the budget?
Sanjiv Bajaj: I believe that it could’ve been done six months ago, when things were far worse than where we are today. Again it’s about what’s the amount that is available to spend. A lot of it are unknowns because it depends on the divestment target, it depends on assets they can monetise — not only their willingness but their ability to be able to do that. Based on that, additional funds that you can get and if you can put it to immediate consumption it will help. But what we’ve seen in the last three months is, even on personal consumption things are improving, people are willing to spend the money as long as they’re confident they have a better tomorrow. So, we have to start working on that better tomorrow. It doesn’t mean I’m saying that take away from what you can get today but my sense is that there are limited options there that are available.
Within the limited kitty, you would rather that the government put more money towards infrastructure, health care as opposed to an immediate short to medium-term consumption boost?
Sanjiv Bajaj: So, in the short term for the next 12 months, I would say, focus on the extensions given for exports, contribute morethis time. The benefit given to corporates for hiring up to 25,000-rupee salary employees, make that 50,000 rupees. The ESIC contribution, extend that further. So, a lot of the current benefits—expand those.
If there is still money left in the kitty continue to help MSMEs. That I think is an immediate need, and help some of the larger, organised sectors which are hurting. So, to meet these would be the immediate priorities for the next 12 months.
I believe if they do that, they may not have a lot more to help on the personal consumption side beyond this. But this itself will continue to give us the impetus required for growth, and then they need to work in parallel focus for the medium term which is infrastructure, health, education, stuff like that. But all this must come with aggressive divestment. This government has the ability and the intent to do that, we need to just see the execution.
Q: You mentioned the bank investment company buzz. A couple of ideas keep coming back every budget – whether it’s a DFI to fund infrastructure or a bank holding company, to take care of PSU bank ownership, or even a bad bank. What’s the realistic expectation on any of these?
Sanjiv Bajaj: India has this great opportunity over the 10-20 years to grow at 10%+. The world is looking for an alternate to China. I don’t think we can replace China and that should not be our aim, but we can clearly become the alternate manufacturing hub that protects IPRs and the others for the rest of the world. If we have to build a real economy like that, you need a very strong domestic financial services economy or sector. So you need Atmanirbhar financial services for Atmanirbhar India. That does not mean don’t bring in whatever foreign capital you can. Bring that in but know that, that foreign capital is also responsible, it will move somewhere else, if it needs to. So, in parallel build a very strong Indian financial services sector. Now, that’s at a broad level.
At the immediate level when 70% of banking is state-owned banks and if they are not going to extend credit, we are not going to see any great growth in the economy. So how do you get them to extend credit? One, they are saddled with bad loans. You have to take it off their books, that’s when the bad bank or multiple bad banks open up. We can see today; these are still small in India but are slowly helping in the resolution of stressed companies. Open up these loans to bad banks to alternative investment funds and other such structures so that they can come in and professionally run it because they are used to buying such distressed debt all over the world. That gives some breathing space to the PSBs.
You then need to capitalise them to be able to grow. Now you can’t capitalise all of them and that’s where you have to keep the strategic ones and divest the rest, that’s what that point of view comes from. Now the ones you capitalise, you better professionalise as well, because otherwise you’ll be faced with the same bad debt situation 10 years down the line and we have seen that cycle in the past. It’s not one element and that’s why you hear so many things because it all follows, one after the other.
Large projects, even today if Germany, Korea, China can have large government-owned domestic financial institutions I think we folded ours too prematurely and converted them into regular banks. But that’s also because we needed banks 25 years ago. So, the timing is good right now to create one or two large ones for infrastructure. Further capitalise NABARD for agriculture and agricultural support, both rural and urban. Use SIDBI for MSMEs and SMEs, you have some of those entities already available because we have to go with all guns blazing as a financial services sector to support the real economy, otherwise we will grow at 6%.
The growth rate used to be 3% that will now be 6% but we will lose that 10% opportunity.
Are suggesting a bad bank to deal with PSU bank bad loans AND a bank investment company to divest ownership AND a development financial institution. All three efforts that you would want in this budget, in lockstep?
Sanjiv Bajaj: So the first thing is, as far as a bank holding company is concerned that is one structure by which then the government is one step away from direct ownership. But they can even keep their direct ownership in a few banks and the rest divest it. That’s more a question of what works for them. But the first one — they need to create those bad banks and take the bad cholesterol outside of the system of the public sector banks — and the development financial institution are both very important.
A part of the challenge in infrastructure projects is that legal cases, getting land, getting other approvals always ends up taking longer than required and to get long term debt in this country at attractive rates is very difficult. For example, I had mentioned one more point. As insurance companies, we have to keep 50% of our investments in government securities. I think that should be brought down to 25%, then we will be forced to deploy them into long term capital requirements. So, we will become a supplier of capital for long term infrastructure projects. So, you have to think of various ways in which you can match the duration of the project with the duration of money that you hold. That’s where the DFI comes into effect, that’s where insurance and pension money comes into play — but each of these need to be then aligned to achieve that end purpose.
You don’t see a challenge in capitalising either a bad bank or several bad banks or even a DFI.
Sanjiv Bajaj: Yes, I think so. The opportunity is there. Instead, as the world sees our intent getting converted into action, you will see that capital coming in. Also let’s keep in mind though, the world is flush with money, it will stay flush for the next 18 months, two years…but at some point of time the pandemic in its seriousness is going to be behind us and governments will start tightening their belts. We can already see with China, that they are sucking up a lot of this money. So, either we do it well (allow foreign capital) and of course there are safeguards around it. So, how much will you do, what kind of safeguards do you put in place, what does it do to your currency rates—you have to look at some of these things but there are very smart people there doing that. We might as well attract some of that now because it won’t exist 18 to 24 months down the line.
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