“What we need is a lollapalooza effect. When many positive factors combine, outcomes can be much bigger than the sum of parts.” He added that India needs to sustain its economic momentum through deregulation, consolidation, and steady growth, rather than depending on isolated reforms.
The Chairman and Co-founder of Motilal Oswal Financial Services pointed out that India is at an early stage of a multi-decade growth cycle but a sustained 6.5–8% growth is critical to keep the long-term compounding story intact.While the market has sprinted from 9,000 to 25,000 in the last 5 years, and domestic flows are likely to surge to nearly ₹7 lakh crore, Agrawal says it’s now crucial for earnings to catch up.
These are edited excerpts of the interview.
Q: Market facing a lot of headwinds?
A: No, you are almost close to 4-5% below the time high. What more can you ask for? We may not be the best market for the current year globally, but on three-four four-year basis, we are the best market, and who knows about the next six months, we might be the best market.
Q: On the GST front, what are you looking for, what will sustainably drive businesses?
A: What will happen in October-November-December as a Diwali dhamakaas promised by our beloved Prime Minister, is one thing; whatever comes through. But the actual opportunity is massive. We are against the wall. Our local economy is slowing down; I mean, various high indicators, including GST collection of 1-2% kind of a net collection growth, and direct tax collection. Housing loan growth, which is a crazy thing. I mean, this country is without houses, and that has grown at about 2-3% only. So, we are in a slowdown mode.
The world respects the growth, and today trade has taken over, even politics. What is the strength of the US today? They are the largest consuming country, and that’s why the whole world is trying to sign anything to access that market, because it’s a $25-30 trillion market. So, how do I become a very attractive market? Now, overnight, I cannot become from 4 to 10 trillion. It takes time, but the growth pace is the story of the country. So that should not slow down.
I must keep growing at about 6.5-7-8% relentlessly without a break. The power of compounding comes when you do not break the compounding. You cannot do for five years, say, 3% and then suddenly two years for 8-10% that does not work, because the compounding is much lower. The mechanics of doing that, of course, our policy makers, fiscal, and monetary regulators, they all understand this; they are brilliant guys. So, I am sure this opportunity in the slowdown, we are against the wall. We have to come out now.
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We should not do incremental changes. This is an opportunity to do a real clean sweep. Brilliantly, we executed GST with all the complications, and we have got this collection. We have bought the entire real estate. So, a lot of reforms have happened.
Q: On GST, when GST was introduced in 2017, the idea behind it was to keep a low enough rate, keep it simple, and that would lead to tax buoyancy, right?
A: No, at that time, if I understand correctly, they tried to copy whatever was a collection happening at that point in time. Say, if I’m paying 28% in cement, let me charge 28%….
Q: …I am saying that the idea that was implemented and then further complicated over the last five years.
A: Not complicated. First was the transition from the old system to the new system, which has happened. So, that is a one-generation reform itself. Second-generation reform is: how do you make GST a tool of development?
Q: So specifically with GST, what do you think should be done?
A: There will be one one-time revenue loss of some 50,000; half percent of GDP here and there, but one-time revenue loss will give you buoyancy for the decades to come. Look at any industry, you have to make taxation in such a way, particularly indirect taxes, where the avoidance is far more expensive compared to the tax rate itself. If my avoidance cost is 5%, tax is 18% there will be wholesale avoidance.
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I met an IAS officer. He told me that the moment you make it to ₹12 lakh, it is such a brilliant thing. All the small traders, those who file a marginal return, will now, instead of filing for ₹6 lakh, they will file for ₹9-10 lakh. So, much more will come into the system. So, this is how it is going to happen: if you keep bringing down this thing, you will encourage consumption, and consumption will give higher taxes. I am not for lower taxes. I am for the collection of higher taxes at lower rates.
Q: Do you think the GST reforms will be enough to spur that consumption growth that we are looking forward to. The first half of the year has been softer than most estimates, but with this tinkering, do you think it’s enough to get us on our way? Monsoon is going to be pretty okay, we have the festive season early as well, and now this GST rationalisation.
A: We need the Lollapalooza effect. What is Lollapalooza effect? When you work from every possible way, you work on the regulations. All the regulators should open up the gates because they have massive regulatory power, and that could do wonders through all kinds of deregulation. Why should government come in the way of doing businesses? Coming to the taxation, this will go big. We are not a rich country. My masses, who can consume, doesn’t have much purchasing power. You tax them at 18-20% for the consumption goods, or maybe there are a lot of things that are not taxed at all, which is also wrong. You got to bring them to 5%. But the guys who actually have money are being taxed like at 28, 40, 50%. Do you want to punish me? Is that the objective, or do you want to collect more taxes? If you bring it down to 15 or 18%, you see the level of consumption will come from the people who can consume.
Q: So what you are imagining, real simplification and not tinkering, where will this show up in a big way in terms of sectors?
A: Where exactly it will show up is manufacturing. But overall, the simplification is important. If you have one low rate for anything, you will get much more compliance and much more collection. I am very clearly for higher amount of tax collection, but at lower rate. So, we got to play that gamble, and it will happen, and evasion will stop. Compliance will increase, and in any case, consumption will respond, because my income is not going down.
Q: Everyone’s been talking about India underperforming in the last one year. Economy has been little bit soft. Do you think from here on, for the next 12 months or so, investors should brace for mid teen returns on the Nifty?
A: Investing is not about one year. If you look at last five years, stocks post-Covid have gone from 9,000 index to 25,000; it is almost 23-24% kind of compounded return. We took a bit of a break. We had a good sprint. DII is buying, on a yearly basis, about 5.5 lakh crore. And we’ll be heading for 6-7 lakh crore in the next 12 months. So, the flow is much stronger. And now with the lower savings rate, the attraction of the markets will become even more.
Markets will do well, provided there is an earnings growth, and that’s why this GST thing comes in picture. Without earnings growth, you can keep dumping money, and that will also slow down. Earning needs to come and it will come only if you have right kind of impetus for demand. In a country like ours, demand driven capex happens because money is expensive here. If there is demand, the world will pour money. You don’t have to ask about it. That’s why GST is very important.
For the entire interview, watch the accompanying video
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