#Budget2014: Inflation may fall only next year - Uday Kotak

We feel that the tone for the next five years will be set in the first Budget…
This is an important Budget, but the focus will be fiscal deficit control. For long-term benefit, people should be ready for tough measures in the short-term. The most important thing in the Budget will be encouragement to financial savings. From 2008-13, a lot of savings of Indians was invested in real estate and gold. Now whatever policies government will bring in, it should be to encourage savers.

Do you think the government will have to take bitter pills to boost the economy?
Yes. The focus of the government should be karega, and not NREGA. The government should move towards supporting aspirations and not entitlement. Subsidies supporting non-productive growth should be reduced. There is still a wide gap in the market price and product price of diesel. There are two options with the government -- either hike diesel price by 50 paise every month or by Rs 3-4 at one go. Once and for all, take the decision and get it behind us. The government should take some of these tough measures and control fiscal deficit. That is the key to control inflation. Till inflation is not controlled, the RBI will not lower interest rates.

There are a lot of challenges in front of the finance ministry as the last government has kept a lot of payment of subsidies pending and many more such things...
The government has a lot of assets. They have Hindustan Zinc, Suuti and Balco, which can be monetised. Simultaneously, public sector banks have non-core assets, some of which could be sold and monetised. With this, the gap of fiscal deficit can be filled.

Do you see listing of LIC?
Listing of LIC should not be in the first year but should be over the next 2-3 years. The government owns 100%. What difference will it make if the ownership comes down to 90%. If LIC is listed, it will be India's biggest company.

When do you see a revival in the investment cycle on a sustained basis?
If companies are able to raise equity from the market, then their problems for financing incomplete projects will come to end. Investment cycle in the capital market can kick-start with the money of savers and investors.

There are concerns regarding balance-sheets of PSU banks. What is the ground reality when you look at those balance sheets?
A lot of infrastructure projects were stalled or left incomplete, and banks have lent money to those projects. We need solutions for these stalled projects. Projects that are viable must be completed. For that, PSU banks have ability to fund. They will need capital to fund these projects. PSU banks can dispose of their non-core assets and bring ownership down to 51%. In five years, new capital should be infused and the governance mechanism has to be made positive.

How far is a genuinely sustainable rate cut?
What we have to be careful is that if we drop interest rates where the rate of interest is lower than inflation then savers will not put money in financial savings and move it to gold and real estate, which is bad for India. Therefore, the ability to drop interest rates is linked to inflation, and to the fact that savers money should come in financial savings. It is extremely important to see interest rates from both savers and borrowers side. Till inflation doesn't come down, interest rates won't come down.

By when do you see inflation coming down?
The earliest inflation coming down is 2015. Not before that.

What is your view on inflation?
We need a lot of supply side action from the government but there are 2 dangers. Monsoons, and Iraq and oil price. Subject to these factors, we should see inflation dropping by the year-end or by early next year.

How long will it take to see a pick-up in the growth cycle and revival in the real economy?
My estimate of GDP growth this year is about 5.5%. Last year, it was 4.7%. The average of next five years is 6.5%-plus. Hopefully, we will end the period closer to 7-plus.