Budget 2015 should lay out economic vision: Uday Kotak

MUMBAI: India’s premium stock market valuations are reflecting a perception among investors that the country’s economic growth will run a ‘marathon’ rather than a ‘sprint’, said Uday Kotak, executive vice-chairman and MD of Kotak Mahindra Bank. The upcoming Union Budget on February 28 is an opportunity for the government to outline the vision for economic growth over the next five years.

“Future economic growth is currently getting into the stock market prices,” said Kotak, in an interview to ET. “The challenge is marathon versus sprint. Do we want to grow at 8% for the next 2 years and then gasp for breath, or build an economic model where India can grow at 9% for the next 35 years?”

Benchmark indices have gained about 42% in the past one year, but the upsides have made stock valuations pricey. The Sensex is currently trading at 15.7 times projected 12-month earnings, compared with the MSCI Emerging Markets Index’s multiple of 11.7 times.

In the absence of a revival in the economic or corporate earnings growth, some in the market have become uncomfortable about the stock valuations. Kotak, however, believes this phase is essential to do the groundwork for sustainable economic growth. “India has to do a lot of fundamental things right now while growth may be slower for the next 1-2 years. But foundation has to be laid for sustainable high growth rate for a longer period of time,” he said.

Kotak is pinning hopes on the government to implement its economic vision in the Union Budget later this month. “The Union Budget is a great opportunity for the prime minister, the finance minister, and the NDA government to lay out the vision for India and the road map for the next 5 years,” said Kotak.

He emphasised that India needs investments before consumption while acknowledging the fact that the focus is on fiscal deficit, which the government is committed to control, and what the rating agencies have also been asking. “The big-bang reforms should not focus on the field of immediate returns, rather it should concentrate on the areas such as electricity, roads, water, health, education and security, and construct right reforms so that people can benefit over the long term,” he said.

The Reserve Bank of India may cut interest rates by another 75 basis points in calendar year 2015 after the 25-basis point reduction in January, said Kotak. The central bank governor is expecting inflation to be around 6% by January 2016, and also sees real interest rates to be around 1.5%, he said.

“According to estimates, inflation should be around 5.5-6% by the end of this year and hence, policy rates should be around 7-7.25% by the end of calendar year 2015,” he added.