Uday Kotak’s explanation of India’s economic slowdown is a must read for everyone

Uday Kotak, one of the most successful bankers of the country and Managing Director of Kotak Mahindra Bank, has explained the reason behind the ongoing economic slowdown and its nature in an interview with Economic Times. According to him, Indian businesses are undergoing the cleansing and purging process, and this is the reason behind the ongoing slowdown. 

On the questions of are we going through a cyclical slowdown or a structural slowdown, Kotak replied, “We got to be clear. We are going through a cleansing and a purging process. Business in India happened in a particular manner for a long time and the rules of the game were different. The rules of the game have changed. Business, in general, has taken a little longer time to recognise the new rules of the game and it is moving towards the survival of the fittest.”

Therefore, Kotak has clearly hinted towards a cyclical slowdown, which will be over as soon as the businesses adjust to the new rules of the game. If we analyze the reasons behind the economic slowdown, there are evidences to vindicate Uday Kotak’s assessment. 

So far, the political economy of the country was operating under the framework of Nehruvian Socialism, where even the private businesses could not exit from the market, as the state gave a bailout package to the companies in the name of protection of workers. 

Now, the Modi government is trying to a rule-based capitalist economy, where only the firms which are able to make the profit will survive and the loss-making ones will exit from the market.

The process of formalization and the war on black money started in the first term of the Modi government. Demonetization coupled with GST started the process of formalization. The informal sector had to suffer the double whammy- demonetization and GST; demonetization destroyed the funding network to the informal sector while the GST forced them to bear the compliance cost. 

Many firms in the informal sector closed down and the demand shifted to the formal sector. Therefore, the sales of the formal sector firms registered growth for few quarters after demonetization and GST. But, as the firms in the informal sector closed down, leading to massive job loss, the demand slumped in the last few quarters.

The job security among the common people forced them to not spend, which eventually resulted in a consumption slump. Given the fact consumption accounts for more than two-thirds of India’s GDP; the GDP growth reached to decade low of 4.5 per cent. 

The sector which suffered most from the demonetization and GST is the manufacturing. The slowdown in manufacturing had resulted in negative Index of Industrial Production (IIP) growth in the last three quarters. 

The corporate leaders at home and around the world have praised Modi government for economic and social reforms. The industry veterans like Ratan Tata, Anand Mahindra and Uday Kotak have showered praises for the Modi government. 

At the time PM Modi came back to power with a greater majority in 2019 general election, Kotak asked for deep economic reform and wished he could see India become a global superpower in his lifetime, “Time for transformation of India. Time for deep reform. I dream of us as a global superpower in my lifetime. Heartiest congratulations to @narendramodi , the BJP, and the NDA,” tweeted Kotak.

Time for transformation of India. Time for deep reform. I dream of us as a global superpower in my lifetime. Heartiest congratulations to @narendramodi , the BJP, and the NDA.

— Uday Kotak (@udaykotak) May 23, 2019

The business leaders like Uday Kotak knows that corporate India needs pills to boost its productivity, and the Modi government is delivering exactly that. 

Kotak is among the most respected industrialists and bankers of the country, he has been bestowed with the responsibility to look after the IL&FS resolution, which, if not resolved, could have resulted in financial crisis in India. “If there are excesses, if there are issues, they will come out and we will therefore see this cleansing process. And to a certain extent, Indian policy has taken a path of not throwing good money after bad,” said Kotak.

The ace banker has rightly assessed the current slowdown, unlike the doomsday predictors, who are trying to create the fear psychosis that the economy will collapse.