Nilesh Shah: ‘Until a medical solution emerges, markets will keep swinging from fear to hope’ – The Indian Express

Nilesh Shah in conversation on Zoom with The Indian Express. (Screen grab)

Nilesh Shah, MD at Kotak Mahindra Asset Management, has spent 25 years in capital markets and has managed funds across equity, fixed income and real estate for local and global investors. In this edition of E-Xplained before a country-wide Zoom audience last week, he discussed the impact of the Covid-19 pandemic on the economy, and ways to contain the damage. Edited excerpts:

On the impact of the pandemic on the Indian economy, and how to recover once a vaccine is developed:

This is the most unprecedented crisis faced by the global economy and India. It’s like the George Clooney movie The Perfect Storm, where a fishing trawler went to a spot where three storms were raging. The global economy and Indian economy is facing a medical crisis, economic crisis, and financial crisis together. This is a Na Bhuto Na Bhavishyati event.

If we look at a very simplistic back-of-the-envelope calculation, our GDP is about $3 trillion. If we remain shut for 47 days at 50% capacity utilisation, with all months contributing equally to the GDP — which is a wrong assumption but only for the sake of simplicity — then roughly the loss of output is about $190 billion… There will be a cost of restarting the economy added to this number. Against that, we will save $40-$45 billion in oil import bill, if oil prices persist at current levels. And we could look to save about $20 billion by replacing made-in-China goods with made-in-India goods. To some extent, import movement has been curtailed, so that will help, and to some extent we will have to make an effort. The net damage that Covid-19 can cost to Indian economy could be $130 billion, plus the cost of restarting…

Now more importantly, how do we contain the damage? There are three ways — attracting foreign direct investment; providing fiscal stimulus; providing monetary stimulus. These three steps together along with medical solutions can reduce the damage.

Whether the Prime Minister’s message of self-reliance means reversing India’s journey of liberalising imports:

The gains of the 1991 liberalisation should not be lost. This has put the Indian economy from sub-4% growth to above 6% growth. We need to consolidate on this and step further.

When I say that you need to replace made-in-China goods with made-in-India goods, it does not mean that we stop importing from China. But we must stop importing those things which we can easily make in India. For example, when you go out on Diwali to buy electric lighting, it is made in China. I’m sure we can make that in India…

The second thing is competing with China. For example, we have one of the world’s largest cotton productions, one of the best quality cottons… one of the world’s largest capacities to convert cotton into yarn. We also know how to weave that yarn into fabric. But when it comes to converting that fabric into a garment, of putting a brand and selling it abroad for exports, we lose out. A country like Bangladesh has three times more garment export then India despite them not growing much cotton or despite them not having much yarn capacity.

Why have we reached this situation? There are multiple factors… Let me give a small example, in China, women are working in two shifts of 12 hours, which is why their cost of making garments is much lower. In India, we do not allow women to work after 8 pm in factories… We need to change our rules and regulations.

Giving the third dimension. In 1980, China and India were of similar size. China became a manufacturer to the world and we were left behind… How do we close this gap? China was able to achieve what it did by attracting all the foreign direct investment that it could. We need to get those companies out of China into India. Today is the best time. The world is suspicious of China. It is being considered as a country which has given the world the novel coronavirus. We are being considered positively as we have supplied hydroxychloroquine medicine to the world. God willing, we shall supply vaccines from the Serum Institute of India, Pune to the world.

We must encash this goodwill by establishing a manufacturing base. We are today the back office to the world. Why can we not become the factory to the world?

On whether MSMEs are prepared to cater to the needs of the corporate sector higher up in the value chain:

… It is clear that Indian entrepreneurs are capable of building large successful companies. But unfortunately, the Indian entrepreneur is like a modern-day Abhimanyu. In the Satyug, Abhimanyu went into the Chakravyuha by his choice. In Kaliyug, he is born into the Chakravyuha. He is destined to fight market competition, volatility in demand/supply, etc. But, many a time, he is struggling with taxation rules, compliance rules, labour in flexibility, land acquisition norms. Even in the Satyug when Abhimanyu was fighting the Kauravas, while he was in the Chakravyuha, he was still under the impression that his uncles and brothers would come and help him. He still lost.

In Kaliyug, if Abhimanyu is not only fighting the Kauravas, but also the Pandavas who were supposed to help him, how will he become successful? This is where the Prime Minister’s announcement comes in that we will focus on land, labour, liquidity, and law. These are the four ingredients that will ensure that our Abhimanyu gets supported. We must support entrepreneurship at the micro, medium, and large levels…

On whether risk aversion among banks would reduce, and whether banks would push credit into the system:

The government has taken a big step by providing guarantee, as this will help ensure that bankers are not afraid of lending. Slowly, we have to make sure that genuine decisions by bankers are not subjected to a witch-hunt by the agencies. When you lend money some decisions will go wrong, that is a part of business. This confidence is the essence of banking and hopefully, with these guarantees, those fears will be behind us.

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On whether the Covid impact on the stock market can go down further:

This will depend on the intersection of a medical solution in the form of of a drug or vaccine, and the quality and quantity of fiscal and monetary stimulus, both from intention as well as execution point of view. These will determine when our economy bottoms out, and subsequently, when our markets bottom out. Obviously, the markets are forward-looking, and they will bottom out way before the economy bottoms out.

On whether the MSME package was not well received by the stock markets:

The market fall can be attributed more to global developments- global markets fell and this probably got reflected in our markets. It could also be a function of having already risen on the day that the PM announced the Rs 20 lakh crore package and hence it was already priced in. My feeling is that market is going to swing —whenever there is going to be news about a monetary stimulus, fiscal stimulus, then markets will move up. In the absence of that news, markets will go down.

Until such time that a medical solution emerges, which gives the markets the certainty that economic activities will resume normally, markets will keep swinging from pessimism to optimism, from fear to hope – this volatility will continue.

On whether the market recovery is broad-based, and whether the stimulus goes to primarily help top corporates:

So, the markets have been extremely polarised. There are few stocks which have done well. Some indices have not fallen as much as the broad market. I think the package today is geared more towards SMEs rather than large enterprises. In fact, most of the large enterprises have had worse cash flow mismatches. They do no worry about survivability… They just need some cash flow so that they can cover their current downturn.

It is the SMEs which require not only monetary stimulus but fiscal stimulus. And this is where the steps were taken by the government, if executed well on the ground, will be a game-changer. And when these SMEs start functioning, with credit flow coming into their balance sheets, that will automatically reinvigorate the economy, and this would get reflected in the balance sheets of large companies…

On whether hotspots in industrialised states such as Maharashtra, Gujarat would delay the recovery in India:

Undoubtedly, this is a worry, and we would require herculean efforts from entrepreneurs, businessmen, government, and citizens. Broadly as we see, there are three models of containing coronavirus. One is a lockdown, which we have experimented with. Second is the South Korea model, where they did random testing on a large scale and enforced strict quarantine. The third is the Japanese model where there is a higher level of public and private hygiene. As a nation, we need to come together through all three models.

On whether there is a greater need to give fiscal support not just to industries but to a large percentage of workers:

Today, this is a one-day match — two batsmen are playing, one is fiscal stimulus and the other is monetary stimulus. Now normally, one batsman starts hitting and the second tries to give scoring opportunities to the first. If the monetary stimulus is in overdrive… then probably we can take a backfoot on fiscal stimulus. When monetary stimulus reaches its limit, then we can increase fiscal stimulus…

On his personal investment portfolio, and whether there is a risk that new investors would be scared out:

I am a mutual funds person, but this does not mean that all my savings are in mutual funds. I am well diversified into mutual funds, equity and debt; I have physical gold for my daughter’s wedding, I have real estate, I have provident funds also.

Now the other question. When returns become negative, it tests the nerves of investors, and we need to pacify them. Today the mutual fund industry has, fortunately, more than 100,000 distributors, who are doing an excellent job in handholding investors in these troubled times. We also have a lot of investors who went through the 2008 experience…

The second question then is that if we are confident about long-term performance of equity, then what about its volatility?… Equity markets are volatile by nature and hence they give better returns than fixed income or silver… The best way to benefit out of the current situation is to be a long-term investor, and to have a disciplined asset allocation.

Audience questions

On whether the government should go in for more borrowing:

I agree. We are one of the few countries in the world which has all the levers available… In India, we can cut interest rates because here it is 6% plus, and our repo rate is still 4.4%. We also have the ability to provide fiscal stimulus because the debt to GDP ratio is 70%, and in the US it is upwards of 100%. We have the ability to create credit. We are a country which has a lot of dead assets, like gold… This can be monetised and brought into the mainline economy.

So, we are one of the fortunate countries which have the choice of either using monetary stimulus, fiscal stimulus, credit creation, monetising dead assets in order to support the economy… Since we today have the luxury of using the tools at our disposal, we are doing what is appropriate. We need to maintain a balance between speed and accuracy.

On whether there should be more market players assisting the government…

From the interactions that I have had with regulators, I believe they are knowledgeable people, be it at RBI, SEBI, or the Finance Ministry. But we must also take into account the current situation.

As an example, Mexico is a country which hedges its oil. An oil-producing country, it hedges its oil in forward markets. When oil prices go higher they lose money, and when prices fall they gain money. But we have never seen Mexican citizens complaining when their government uses money in hedging.

… We have to give space to our regulators, to our decision-makers, that they can make legitimate errors. We want everyone to be perfect. How can this possible? We need to give them this freedom.

Transcribed by Om Marathe 

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