GST could give the boost to job creation in IT, logistics sectors: Saugata Bhattacharya

In a chat with ET Now, Mythili Bhusnurmath, Consulting Editor, and Saugata Bhattacharya, Economist, Axis Bank, discuss the fate of PSU banks and effects of implementation of the GST.

Edited excerpts:

The parliamentary panel is waving the red flag, saying something needs to be done and it needs to be done now. Do you see this as really being the check and balance that would be put in place for spearheading the cleanup of banks that urgently needs to be done?

Mythili Bhusnurmath: I would fervently hope so because IDBI Bank has really paid the price for its government ownership. There was a time not so long ago when both IDBI and ICICI were premier development banks with IDBI clearly the more premier of the two but unfortunately thanks to a number of mishaps as it were, government indecision, ICICI was able to convert itself into a bank much before IDBI was able to do likewise. IDBI lost out on that first move of advantage it became a bank much later, it was left to hold in the can as it were. All the bad loans came from its development bank status and as a result it really has been carrying a baggage of the past. The only way IDBI Bank will be able to do anything about that bad loan baggage would be if they were allowed to function with arm’s length distance from the government on completely commercial lines. Unfortunately in the Indian context that can only be done if government allows its shareholding to fall to below 51 per cent. Since I do not see that happening, it is good that the parliamentary panel has rapped the government because IDBI Bank must be played squarely at the door of the Finance Minister. Had they been allowed to convert themselves into a bank at a time that ICICI Bank was allowed to convert itself into a bank, we would still have the problem of NPAs but much much less.

So the problem really is not just for IDBI Bank. The entire public sector bank space will get solved only if the government allows banks to function at arm’s length distance purely on commercial consideration but that the government is just not willing to do so because it likes to use public sector banks as handmaidens of the government whenever it wants to push through social agendas. I would be very happy if the government were to experiment and like in case of the UTI Bank allowed it to get out of the public ownership space and reemerge as Axis Bank in the private sector space. We could replicate that in many other cases in which case the entire NPA burden would come down.

I know it is a little unfair to ask Saugata particularly because he comes from Axis to comment on that. I would just like to draw him in and ask him that would it not be good if the other remaining public sector banks were to follow in the footsteps of Axis as it were and got out of this terrible buying that comes out of public ownership?

Saugata Bhattacharya: Talking with half a can of information is probably not wise but I completely agree with you that from UTI Bank, Axis has been a superb success and the government to its credit, is beginning to look at some of the issues more seriously. It is not just the Indradhanush initiative but some of the recent steps that it seems to be taking seems to suggest that they are now looking for process improvement to make lending by the public sector banks on a more commercial footing.

Mythili Bhusnurmath: Do you think that reforms are on a fast track now that the cabinet has approved the GST bills? How much of a difference will it really make assuming that we stick to the July 1st deadline? Will the initial days of GST be more disruptive and are our hopes pinned a little artificially high?

Saugata Bhattacharya: I do not see any of us seeing that the GST conversion of indirect tax structuring to GST format will have an immediate impact. All of us now pretty much agree that the initial impact will likely to be disruptive in terms of growth, in terms of certainties, in terms of the IT assistance that need to be put in place, the effects on inflation and this is pretty much suggested by the experience of New Zealand, Europe, Australia, all the countries that have moved into a VAT style structure of indirect taxes. That is the initial disruption that is quite evident in almost all the economies. But from a reform perspective, the kind of IT assistance that will be put in place, the kind of logistics improvement that this will bring about, the improvement in tax compliance that will result from this over a period of time, is one of the major reforms that we have seen.

Mythili Bhusnurmath: It is true that the GST system will require extensive computerisation even in much smaller companies and firms? Will that offset to some extent the kind of job losses that we are seeing in the IT space because whatever growth we have seen has largely not been accompanied by jobs and if we see growth slowing down as a result of the disruptive effect of GST, then what does that mean for jobs because ultimately at the end of the day what we need jobs more than growth?

Saugata Bhattacharya: Absolutely, completely hit the nail on the head. This is the most worrying part of economic growth now. Economic growth will revive either in the next six months or one year or whanever. It is much harder to talk about a revival in jobs growth. Coming to IT, remember almost 90% of companies in India are very ill prepared for the shift to GST.

So this will entail a huge opportunity for domestic IT and that will partially offset some of the issues that their external revenues are now facing. This is probably the equivalent on steroids of the Y2K opportunities that the Indian IT segments captured and leveraged on. So, probably not just IT, the logistics space is probably one more area that has the potential for creating jobs, maybe not very high paying jobs but jobs nevertheless and then as more IT systems come into place, as productivity increases, maybe that will begin to have an effect on the wages, salaries of the workers involved in those activities.

Mythili Bhusnurmath: Are you a little surprised by the kind of reaction we have seen in the currency markets post the Fed action? Does it seem as if that the bond markets are a little bit more rooted in reality than the currency markets because in the bond markets, the yield has gone up logically speaking. That should have been the logical reaction but as the currency seems to be strengthening day after day, what explains this completely divergent and a little irrational behaviour of the currency market?

Saugata Bhattacharya: You are completely right about the bond markets. The bond markets reacted to the Reserve Bank’s unexpected shift in stance. The Indian bond markets have been following US bond markets and from the Fed’s less than hawkish statement after the expected rate hike that brought US yields down, Indian yields followed. Indian yields are behaving on more expected lines. On the forex side, we are all puzzled. Of course, the initial move was quite unexpected starting from the post the UP elections but my sense is, that the initial move by the Indian rupee completely diverged from the entire EM complex in terms of the movement against the dollar.

This did not have so much to do with flows. We have got about $600-700 million flows into equity markets that day partially but I think the large part of the move is probably due more to positioning and this is coming from speculative hypothesis.

We have looked at the NDF market and it looks as if the NDF market was the initial rider, after that over the last couple of days we are more in line with the entire EM complex but the initial move seems to have been driven by the NDF market. This of course begs the question of what drove the NDF markets, that is difficult to say really but it is presuming that that somebody had taken a wrong call on the election outcomes and positioned themselves on the weakness of the dollar and so on. Those positions to be closed and that was what created the move in the onshore market themselves.