Government may miss the year's divestment target: Nilesh Shah, MD, Kotak Mutual Fund

Nilesh Shah, Managing Director, Kotak AMC Ltd. talks about his budget expectations, challenges of the government to bring it back on the track of growth and divestment targets among others during an exclusive interview with Anil Singhvi, Managing Editor, Zee Business. Edited Excerpts:  

Q: Expectations arises in the name of the budget with a hope that it will carry something for us. Do you think that we should have expectations from the Union Budget 2020 this time too?

A: Definitely, the market has high expectations from the budget. Everyone is expecting that the government - through this budget - would bring back the economy on the path of growth. And, they are sitting with the same hope. 

Q: Do you think that individual tax can be brought down in line with the corporate tax cut, which was announced in September 2019? Will the government's balance sheet allow it to do so?

A: The government - in this budget - will have to increase its revenue, as the fiscal deficit will have its pressure on the budget. It will also have to reduce its cost and propel growth. These three things are conflicting in themselves. How will you propel the growth by reducing the expenses? Same is in the case of tax and if it is increased then what it will do to bring the growth. Thus, they will have to be innovative in this budget.

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When it comes to the way to increase the revenue, then both of us know that the tax burden is very high on the salaried class as compared to the business class. And, the same goes for the agricultural sector, regardless of the amount you earn in the sector you are not supposed to pay taxes. I think the government - in this budget - should implement a process in which people start disclosing their agricultural income, even it is not taxed. It is said that 'Sunshine is the best disinfectant', it means that if people will have to disclose their agricultural earnings then possibilities are that a small deduction would start for the segment at least in case of those who reap tax benefits by showcasing their agricultural income. Further, maybe after 5 years, we will, probably, reach a position where agricultural income above a certain level can be taxed.  

Secondly, the revenue can be raised by closing the loopholes in the taxation system. In the past, there was a practice in which dividend stripping and bonus stripping were functional, which has been closed to a certain extent but there are several other things, which when plugged will reduce the number of loopholes and result in increasing the tax revenue. Thirdly, we should copy the act of Margaret Thatcher that was performed in the United Kingdom. She not only sold the shares of British government's companies but also sold their assets like the home of the civil servant by allocating a particular salary in form of housing allowance to them. She also sold-off the public space like garden and auditorium. With this, her government turned asset-light and the money that was raised by selling those assets was invested in the infrastructure. 

Our government should also look forward towards the process of selling its assets and divesting the public sector companies. It should also try to monetize the custodian of enemy property, which numbers around 9,000-10,000 properties with a market value of Rs 1 lakh crore. Thus, raising revenues through this process will bring enough money to invest in or meet your expenses. 

Q: The biggest challenge for the government at this point in time is to meet its divestment target of this financial year. Do you think that the divestment target will be achieved and there will be an increase in the next year's target?

A: There are very good chances that the government will miss the year's divestment targets this time but from this, it should learn the art of how to do it in the coming years. If you want to balance the budget then you will have to go for divestment. Plus, a good amount of FDI is reaching to India and global interest rates have come down to zero levels. So, it is a time to pull the global capital towards the Indian market. Thus, the divestment target can be achieved by packaging them in the right way and provide the right environment for it. But, you will have to work for it. 

Q: Fiscal deficit numbers may swell if the government fails in meeting its divestment targets. Do you think that the fiscal deficit numbers will go up this time?

A: Fiscal deficit number will go up. If the expenses are restricted then the projected GDP growth of 11.50 % will not be achieved and the fiscal deficit will go up. So, it is better to spend on the fiscal deficit and increase the GDP so that the overall fiscal deficit numbers turn reasonable. I think some relaxation should be granted to the fiscal deficit in the coming 2-3 years so that the government can spend on infrastructure creation and promote growth. 

Q: Let's say that it stays at 3.75%. Don't you think that it will hurt the market?

A: Definitely, the market will be shocked but if you are able to convince the market that this 3.75% or 4% numbers will be brought down back to 3% in the next 3 years. And, at this moment, we are spending in capital expenditure instead of revenue expenditure to boost the growth and GDP, them the market will accept it. 

Q: If the fiscal deficit goes up, then while going through the budget I will have to have a look at the area where the money is going? 

A: In the case of a fiscal deficit you should have a look at the revenue deficit and non-revenue deficit. 

Q: You said that the government will have to be do something innovative and at the same time, should reduce its expenditure. Do you think that there is a room where the government can reduce expenditure? 

A: Lot of expenses of the government is a fixed one like salary, pension bill and interest payment, but still it can go for zero-based budgeting. Even today, we have many officers who are taking pensions. So, as we did it in the gas, where we asked people, who were capable, to not take the subsidy after which around 1 crore citizens have given their subsidies. Thus, we will have to look at the things through zero-based budgeting to find out the justified expenses and those where expenses can be downscaled. I think, at this juncture of time, despite fixed payments of salary, pension and interest, if the government go ahead with the zero-based budgeting then it may get the chances of improvement in the expenditure.  

They, a few years back, have launched a portal where things were purchased online. The process automatically brought down the cost and also stopped the leakages. So, we should try to find the ways where the output of the expenses remains the same but the overall number of expenses comes down.

Q: It means expecting that personal taxation can come down, is wrong? 

A: Personal taxation can slightly come down because if you want to boost the economy then you will have to either increase the investment or consumption or government spending or export-import. So, if you have to take some step to increase the consumption then you will first have to put some money into the hands of people and any cut in taxation rate will automatically bring money into the hands of the people. That's why I believe that you can expect that the personal income tax at the bottom-end of the pyramid starts coming down via this budget. 

Q: It means such relaxation should be beneficial if it is provided to those with low income? 

A: Absolutely because our saving or expenditure pattern will not change a lot in accordance to the tax but if those at the bottom of the pyramid or at the lower-end level will get Rs5,000-10,000 then there is a chance that that will be spent. 

Q: Lot of investments are made on unproductive assets like lands and gold among others. So, do you think that the government should take steps to ensure that the money is invested in the right place that has the capabilities of paddling economic growth?

A: Definitely. In the last 8 years, the country has spent approximately $245 billion officially and $55 billion through smuggling, combined $300 billion, on the export of gold and other precisions stones. If the amount spent on these items would have stayed in India than the Indian GDP would have been 11% higher at present. So, we should find ways to save our savings that are moving out through leakages. For this purpose, it should have a rule that simplifies the pattern of gold buying in which a women runs a VC at a jeweller shop that runs in the proximity of her house. In the process, she pays 11 instalments and the last instalment is paid by the jeweller and then she returns home with a piece of jewellery. So, all financial instruments should be eased in a way that they can be used in buying gold jewellery. It should be simplified in the way in which the women who go to a jeweller and buys the jewellery can also buy a mutual fund unit, insurance policy and make a bank deposit. These efforts will help in shifting the savings from gold to financial instruments. 

Q: Any possibilities in which the long term capital gains tax will come to an end or STT comes down? 

A: I feel LTCG relaxation - at the time when 200 stokes are above January 2018 level while 2000 stokes are down - will not have any big impact on the revenue but definitely will change the sentiments into a bullish one. Even the government has said in the Parliament that STT is being implemented just because LTCG is being exempted. So running the two simultaneously is not a good idea. 

Q: What can be done to end the LTCG?

A: The old provisions of long term capital gains should be restored above one-three years. If you feel that it should be provided just to HNI investors and not to the promoter then go for it. 

Q: What can be done that gives a feel to the market that this budget belongs to us?

A: Several things should be done within and outside the budget to improve the sentiments of the market. The market can be run in three different modes and they are (i) put money, (ii) improve the sentiments and (iii) correct the economy. If a good budget is presented that provides a condition in which revenue is raised through asset monetization, zero-based budgeting helps in reducing the cost/expenditure and the fiscal deficit numbers remain at the reasonable levels and push up the growth. Such a condition will improve the sentiments which in return will start the flow of money and the government as well as India Inc will get time to improve the fundamentals of the economy. 

Q: Do you think that it is the right time to rationalise the dividend distribution tax so that people don't have a feeling that we are paying more taxes?

A: There was a time when no taxation was imposed on the dividend distribution tax (DDT). Then they started taxing it but it should be rationalised. But, it is a time when there is a pressure on revenue then either LTCG can be removed or DDT can be rationalised. There are fewer chances in which both things will occur in a go. But, if done then it will be a good thing for the market but if any one of them is done amid the fiscal deficit pressure will also work then also it will work.

Q: Which of the two is best for the market?

A: I think, LTCG tax exemption will be welcomed by the market. 

Q: Do you think that the budget can add pace to the economy that is slowing at present or something can be done for the purpose, if yes, then what?

A: If you try to find the reason behind the economic slowdown then you will find that the incremental inventory addition between 2006-2012 was roughly 4-5% of the GDP. However, the last available number of 2018 says that the incremental inventory addition came to 1.8%. This is the same time when we saw that the banking credit which ran along with the GDP has gone down. In 2014, for an incremental GDP of Rs100 a bank credit of Rs144 was being provided, however, it comes down to Rs86 in 2018. Now, the inventory came down and the bank credit came down simultaneously. The bank credit has reduced by around Rs5.50 lakh crore in the financial year 2019-20 as compared to the last year. Thus, an equation being established that says that the working capital is not available, bank credit is not available and that's why people haven't stored the inventories. Non-storage of inventories led to a reduction in production, which had a direct impact on the GDP. There is a need to start the credit cycle and make it available to business people, who are in a need of the credit. Such an exercise can propel the revival of the GDP. 

Q: Can you name the sector that should be given relaxations or those who can propel growth if relaxation is granted to them?

A: There are two points, one is the one that needs relaxation while the other who can benefit the economy if relaxation is provided to them. So, there are two sectors that need relief and they are the real estate sector and Non-bank financial institution (NBFC). There is a slowdown in the real estate sector, however, RERA has inculcated some discipline among developers but they have not been able to transmit the same due to the lack of support. The developers are standing at the wrong side of the problem, which has had an impact on the economy as well as the flat buyers. So, there is a need to restart the flow of credit into the real estate sector, so that these half-completed projects are completed and the money that is stuck starts moving. The second thing is NBFC, then I have earlier said that if compared to 2018 then inventory addition has moved into a negative zone. The bank credit is moving in the negative zone. NBFCs were acting as the last-mile connector for the SMEs and non-banking businesses but today they are in a condition where they don't have money at there end then how can they lend. So, if the problems of these two sectors, real estate and NBFC, is sorted out then I feel that the GDP revival will start. 

Q: Should the government provide additional tax relaxations to those who are buying or building new homes?

A: I think, certain concessions will be announced in this business to revive the real estate sector but the government must ensure that these concessions are time bond not unlimited so that people can make a decision without delays and then buy a real estate.