BQ Edge | Kotak AMC’s Nilesh Shah Suggests Two Ways To Boost Non-Tax Revenue

Maximising the limited flexibility on the income side could be key to a game-changing budget, says Kotak AMC’s Nilesh Shah.
Finance Minister of India Nirmala Sitharaman (Source: PTI)
Finance Minister of India Nirmala Sitharaman (Source: PTI)

As the government doesn’t have the flexibility on expenses, the key to presenting a game-changing budget could lie on the income side, according to veteran fund manager Nilesh Shah.

The budget allocates expenses to a fixed set of segments like salary, pension and defence, leaving no room on expenses, Shah, managing director of Kotak Asset Management Company, said in a BQ Edge event, BloombergQuint’s on-ground initiative. Effectively, the only leeway the budget has is non-tax revenue, he said.

“If this budget has to be path-breaking, it should raise non-tax revenue either on the debt side or on the equity side or both,” he said.

Domestic savings have a limited capacity and India needs to attract foreign capital into debt, he said. India’s forex reserves worth $426 billion have not let it cement a place in the Emerging Markets Bond Index that houses China with its reserves worth $3 trillion, Shah said. “If this budget announces a path to enter into the Emerging Markets Bond Index, which eventually opens up $100 billion to come into the country, it’s a game-changer,” he said, adding that the impact will reflect in the next four-five years.

On the equity side, strategic privatisation could make the budget a game-changer. “Privatising public sector companies like Air India, BSNL and MTNL at the right time could have averted losses worth over Rs 10,000 crore we see today.”

The path of unlocking value for public sector enterprises is important, he said, adding that any foreign player would have given thousands of crores worth to enter the Indian aviation market had the government privatised Air India at the right time.

“We didn’t do the divestment at the right time, so today we have lost more than Rs 60,000-70,000 crore in Air India,” Shah said.

On Privatising Assets

  • India has the option of doing this in the budget or outside the budget.
  • If done in the budget, it’s a strategic declaration of intent, increases investors’ confidence.
  • Any company will give its arms and legs for getting into India’s mobile phone market.

Expectations From Budget

  • Government needs to carry forward the two “good things” it did in the last five years: Fiscal discipline and ensuring the macro-economic stability in the country.
  • Growth will come through entrepreneurship, with steps like the GST and the amplification of a lot of taxation rules.
  • With GST, demonetisation, Aadhar and Benami Property Act, tax collection has started improving.
  • From 10 percent tax-to-GDP ratio, we are moving towards toward 12 percent but the ultimate journey is towards 16 percent, which is the emerging market average.
  • With more innovative financial instruments, we can actually bring gold imports to zero.


  • India has gone through a transition by sacrificing growth for attaining macro-economic stability.
  • When the government cuts expenditure to check fiscal deficit, inflation drops but so does growth.
  • When you clean up the bad loans and curb frauds, the growth stops. It’s like a purification process.
  • The market has priced in the hope that the liquidity will improve, and the signs are visible.

Watch the full interview here

Here’s the edited transcript of the interaction

The budget which will come out on July 5 will be “make or break” for a lot of people. Many believe that if budget does ‘X’, the economy and the markets will do ‘Y’ and if the budget doesn’t do ‘X,’  the economy and markets will definitely not do ‘Y’. Is it that stark?

Budget is just a statement of account for the government. It has very limited influence on the economy. My guess is that what happens outside the budget has far more impact on the economy than what happens inside the budget. But occasionally you can create a budget which can change the course of India and this budget is no different. So, for example if you see the budget, expenses are almost committed. I can’t change the salary, I can’t change the pension, I can’t change defense, I can’t change interest payment, and I can’t change the subsidy. So, effectively, you have no flexibility on the expenditure side. Then, if you come to the income side, you have limited flexibility. So, effectively the only leeway the budget has is a non-tax revenue. Now, there are two types of non-tax revenue, one is debt and the other is equity. If this budget has to be path-breaking it should raise non-tax revenue receipt either on the debt side or on the equity side or on both sides. Now on the debt side, the domestic savings have a limited capacity. So, you have to attract foreign capital. If this budget goes and says that India will be a part of the emerging market bond indices, that’s a highway to collect probably between $75 billion and $100 billion. You bring $100 billion into the country; your growth gets accelerated. China has $3 trillion reserves and they have already joined emerging market bond indices. We are at $400 billion dollars reserved—$426 billion to be precise — and yet we are not part of the Emerging Market Bond Indices. So, if this budget announces a path to enter into the emerging market bond indices which eventually opens up $100 billion to come into the country, it’s a game changer. The effect of this will be seen in next four-five years.

The second option is that instead of debt we choose the path of equity. Now, we all know the public sector enterprises have very good talent, but they operate in a very constrained manner. Case in point is Hindustan Zinc Ltd.; it has one of the best mines in Rampura. But as a public sector enterprise, it mines only 100,000 tonnes and it was dependent on government support to survive. Now the previous NDA government privatized Hindustan Zinc ltd, and it was sold at a very small sum. But today it produces a million tonnes. So, 10 times more production in about two decades. In these two decades, it has paid back Rs 1.6 lakh crore to the government by the way of dividend and taxes. And today it pays the government by the way of quarterly dividend more than the price at which the entire company was sold, or the majority of company was sold. And imagine if we take this path of unlocking value for public sector enterprises.
Air India was 100 percent a monopoly on the Indian skies. Any foreign player would have given thousands of crore to enter into one of the largest aviation markets. We didn’t do the divestment at the right time, so today we have lost more than Rs 60,000 crore-Rs 70 thousand crore in Air India and I think this year’s loss is about Rs 7,000 crore Now, imagine if Air India was Hindustan Zinc. Instead of paying 60,000 crore, the government would have collected may be Rs 1.6 lakh crore , or Rs 3.6 lakh crore. Air India would have reached its glory days and it was the world’s finest airline under the Tata airline name, and we all would have had a great airline and the country could have saved money.

Now, extend this to BSNL, and MTNL. Their combined losses will be Rs 10,000 crore this year, and we have lost thousands of crore worth of money into it, but if we would have privatized them when they were 100 percent monopoly in the Indian telecom sector, we could have collected thousands of crore in money and they would have contributed thousands of crore. So, we can take the strategic divestment route where we unlock the potential of public sector enterprises by entrusting it in the hands of private enterprises. So, either of these routes can make this budget a game changer for years to come but if we miss that, we can still do similar things outside the budget.

Everybody said that watch out for strategic privatization and there is no need for the government to pay so much of interest on the debt they have and instead privatize some of these assets, reduce the debt of the country. Is the budget the platform to do that, or do you think this can be done outside the budget?

You always have option of doing it in the budget or outside the budget, but if we do it in the budget, it’s the strategic declaration of intent. It increases investors’ confidence and today we haven’t liberalized our domestic market. For example, we spend about $17-18 billion dollars on import of mobile phones, and as of late we have started doing ‘Make in India’ and there are 120 companies which assemble mobile phones in India, but 1$7 billion is a large amount.

Any company will give its arms and legs for getting into this market. Now imagine if we could have gone to someone like Nokia, Samsung, Apple and said offered them the exclusive access to Indian market, but one promise was that they will make phones in India, not just assemble but just make it in India and second whatever imports they made were also equally exported. Do you think someone will come and buy that out? My answer is yes. I mean we imported $10 billion worth of broadcasting equipment and accessories.
In mobile, $17 billion might not be a very large sum but in broadcasting equipment and accessories, $10 billion is too large a sum, and I don’t think we have any company which makes broadcasting equipment here. If we had gone to one of the companies, that will give you the access to this large domestic market but whatever import you make please make sure that you balance it with an export. I think many people would have jumped into it. So, if you declare your intent like this in the budget, it is heard, it is amplified. And then, of course, execution can always be done outside of the budget and even if you miss it in the budget there is always opportunity to do it outside the budget.

There is a lot of clutter about how this budget could lay the road map for the next five years, and this is the opportunity to do so. Do you believe the present scene is that there is opportunity to do so or there is something that government could or should do, which may not be at a grand scale but lays out the vision? I remember during NDA-1, fiscal deficit was laid out which showed such vision or intent, what else do we expect could happen?

So, one, they have to carry forward the good thing which they have done in the last five years, one which is fiscal discipline and second, they have also ensured that there is macro-economic stability in India. We have brought down inflation from 10 percent to 4 percent. We have brought down NPAs from, who knows what the number was from double digits to single digits. So, there is a micro economic stability which has been hard fought and won. Now, we have to go for growth. If you see over the last five years and before that also, a lot of things happened. Somewhere it has laid the foundation for India to accelerate. Our first problem was that we were too bureaucratic to do business. Our entrepreneurs were like Abhimanyu— he didn’t choose to go into Chakravyuh, he was born in it. He was not fighting the Kauravs which are markets and entrepreneurs. He was also being hit by Pandavas which is your bankers, regulators, tax authority. No one is supporting our Abhimanyu, yet he continues to fight. Support our Abhimanyu because at the end of the day, growth will come through our entrepreneurship. Now, some steps have been taken. GST and the amplification of a lot of taxation rules. It’s a level-playing field between not-so-honest businessmen and honest businessmen. The second buddy was inflation, we were always heading 10 percent-plus inflation, there were few periods when inflation would cool down due to external factors but then it would again bounce back. Now we have controlled it and brought it down to lower single digit which is a huge achievement. Third, our tax compliance standards were very poor. We were more like an African nation and anyone who is from business community will realize how honestly people pay taxes now with GST, Demonetization, Aadhar, Benami property Act, tax collection has started improving. From 10 percent tax to GDP, we are moving towards toward 12 but the ultimate journey is towards 16, which is the emerging market average.

Our savings allocations were good, savings investment was good, but the allocation was poor. We send money abroad for import of gold, silver, diamond, pearl on an average $30-40 billion leaked out every year. We were a patient who was not healthy but was giving blood donation rather than receiving blood transfusion and then was blaming the doctor that his/her health was not improving. Fortunately we have recognized this.

Gold imports have started coming down and gold bond kind of schemes have come and if we are becoming more innovative financial instruments, I have no doubt in my mind that we can actually reverse the gold imports and bring it down to zero. It won’t happen overnight, but we can work in that direction. Banks were suffering from NPAs but now they have been cleaned up to a great extent. 100 percent job is not done but the majority of the job is done. So, this all laid the foundation. Now how do we grow at 10 percent-plus rate? In 1978, India and China were of similar size, it continued almost all the way up to 1984 where they were marginally ahead. Today, they are five times ahead of us. So, in about three decades they have left us behind by a big margin. Now what did they do which we couldn’t do? They became manufacturer to the world we really couldn’t capture. But today we have a similar opportunity courtesy tariff war unleashed by President Trump. All the exporters from China who export to the U.S. are coming under an increased pressure to shift their factories. They are moving to Bangladesh, they are moving to Cambodia for footwear, they are moving to Indonesia and Thailand for electronics, they are moving for computers to Taiwan. They are moving for food processing to Vietnam, but India doesn’t appear anywhere. Now two of the largest buyers of Chinese goods in the U.S. are Amazon and Walmart. They haven’t entered China yet even thought they are the largest buyers of the Chinese goods and in India, we have given them a place in our mobile phones. Now all we need is to walk towards them and say that we have given you the entry in our mobile phones, you are most welcome in India but now please help us request some of your producers to shift their base to India. And we can’t change the whole country for favoring these exporters, favoring these manufactures but we can create few pockets. Here all these manufactures are given a 10-year policy holiday, our bureaucrats and inspectors won’t go and harass them. And we give them connectivity through which they can export as efficiently to the U.S. and other parts of the world as China does. We ensure that power is made available to them. I think with that kind of package and that kind of request from Walmart, Amazon and other manufacturers and if needed we can always add the lure of our domestic marketers, access to our domestic market. It’s possible that over the next five years we can capture a large percentage of these manufacturers. It helps India improve in manufacturing and we then can go to 10 percent GDP growth.

This debate that a lot of people have around fiscal deficit numbers and some people have argued that because the economy seems to be slowing, it is okay for a change to miss the fiscal deficit glide path and have a higher fiscal deficit but give support to the economy but there are equal numbers of people who don’t want to miss that path. What do you think the government can do and how would the markets react to either things?

So, we must realize that the global advisors have two different standards. In Asian crisis as well as in 1991-92 Indian crisis, as well as the current advice to some of the countries like Turkey, Indonesia, they have always said that you should maintain fiscal deficit, you should increase interest rate, you should depreciate your currency, you should give benefits to your citizens. But when it came to America and Europe, they did exactly the reverse. In global sub-prime crisis which was named global crises as if it was affecting the whole world, well it was only the American sub-prime crises. They increased the fiscal deficit to 10 percent of GDP, they lowered the interest rate to negative level, they expanded the Fed’s balancesheet by trillions of dollars. In effect, they did exactly the opposite of what we were advised to do. So, let’s be very clear that global people have their agenda and we have to do what is right for us. And today, if there is a country which is earning 100 and spending 105 and if that five is going for infrastructure, then it is advisable. But if that five is going for payments and salaries and wages and pension, then it is not advisable. Not because of global advice but because of our own interest we should ensure that the fiscal discipline remains under check.

Second, whatever expenditure is required, we have immense amount of assets to monetize. I spoke about strategic divestment, let’s talk about something else. The government of India passed a law called Custodian of Enemy property Act. This was passed somewhere in the mid-60s. So, all those people who left India to go to Pakistan, they had their properties left behind and after the first war with Pakistan we declared them enemies to take over these properties. It primarily has real estate but also has financial assets. Now, from 1965 all the way till late last year, we had just kept that property under custody. I mean why are we keeping those assets? The people who had migrated to Pakistan, they are not going to back over here and even if they come back, we are not supposed to give back that property to them. Because people who migrated from Pakistan to India and left their property there that’s been taken over by Pakistani government. So, it’s a quid pro-quo. We believe the value of those assets is almost Rs 1.25 lakh crore or about Rs 100,000 crore real estate and about Rs 25,000 crore financial assets. We monetized small portion of that in last year’s budget, why can’t we monetize the rest for funding of next two-three years’ budget? All those real estate properties which undisputed ownership is, or which is owned by government, probably has already been encroached upon. We just need to put a judicial system in process with which those assets can be monetized for the rest of India. So, we have so many assets which we can monetize and hence without compromising on fiscal discipline I can raise as much revenue as necessary to fund infrastructure.

As you look at the markets over next six months, the global picture, G-20, NBFC crisis etc., what’s your level of confidence? Do reckon that over the next 12 months we have he potential to inch higher? Can we do that?

One, you must realize that today’s index does not reflect what is happening in the market. Study was done by someone which was circulated in social media, between Jan. 18 to June 7, 2019 and the top 20 performing stocks delivered combined 10 percent of average returns. 21 to 100 has delivered minus 9 percent of negative returns, 101 to 250 has done 25 percent and 251 to 1,500 is down 15 percent. So, yes, the index is stable, but down below there is a huge correction. Even those who have direct investment in small and mid-cap stocks will recognize how your portfolios are, now why have we seen such a sharp correction? Partly the 2017 mid, small caps delivered 50 percent-plus returns, therefore there has been a correction. Partly we have gone through transition in our economy where we have sacrificed growth for attaining micro economic stability. When you bring down the government expenditure for fiscal deficit then inflation drops but so does growth. When you clean up the NPAs and don’t give money to Nirav Modi and Mehul Choksi yes, the growth stops but the NPA also cleans up. So, we are going through that purification process.

The third, we also saw scenarios where the liquidity was very tight, interest rates were very high, and transmission of credits was restricted. Now this was all necessary to purify the economy but now the same can be relaxed as a lot of objectives have been achieved. So, today the market has priced in the hope that the liquidity will improve, and the signs are visible so it’s not a hope in air but it’s hope on data. Signs are visible that interest rates are being cut and that it will be cut more. Signs are visible that NBFC crisis is being settled, the PSU banks will get capitalization from the RBI’s reserves probably. That will start the transmission of credits which will be pro-growth. Monsoons has been in deficiency, but July-August monsoons will be critical, and market is hoping that monsoon will be normal despite U.S.-Iran talking about lots of things, oil crises have remained stable and the market is hoping that oil prices will remain stable. So, with the liquidity improving, rates being cut, transmission getting restarted and monsoons and oil remaining under control, market is hoping that there will be recovery. The recovery will be more in small and mid-cap stocks not necessarily from tomorrow or day after tomorrow but over the next 12-18 months. The recovery may not be as strong in top 20 stocks because they are already expansive and somewhere between 21 to 250 there will be modest recovery. So, the overall index may not give you that much sense of returns but my guess somewhere in that small and mid-cap you will see good return opportunity.

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