The story of Uday Kotak and Kotak Mahindra Bank Ltd, now India’s fourth largest private-sector lender by assets, goes back to just a few years before India liberalized its economy. It was in 1985 that Kotak started its journey in financial services with a bill-discounting business launched under the brand name Kotak Mahindra Finance Ltd. The business soon expanded into areas such as auto finance even before liberalization of the economy opened up a new world for private-sector financiers in the country.

Soon after the opening up, in 1995, Kotak formed a joint venture with Goldman Sachs for investment banking. In 2003, Kotak Mahindra got a commercial banking licence and transformed into a bank. Uday Kotak believes businesses such as his and many others benefited from liberalization. But did they handle the freedom with adequate responsibility, he asks. Edited excerpts from an interview:

It’s been 25 years since liberalization. Has it played out the way you expected?

I genuinely believe that we are a product of Indian liberalization. We are now 30 years old, so the 25-year period of Indian liberalization in a way converges with the development of Kotak.

July 1991 was the turning point for India. The animal spirits were first released then. But if you look at the last 25 years, along with liberalization and reform comes responsibility.

Probably India could have done better in terms of how maturely we handled the opening up. If we had done that, we could have prevented a lot of accidents we have seen along the way. Look at both the financial sector and the real sector. In 1992, we saw the securities scandal which happened immediately after liberalization. Thereafter you saw the 1997 non-banking financial company and C.R. Bhansali scandal. Then you saw the Ketan Parekh scam.

From the industry point of view, the first reaction to liberalization was denial. You saw the formation of the Bombay Club (which lobbied for protection from foreign competition). But once business and industry realized that there was no option but to change, Indian industry, particularly manufacturing, geared up for the change and went to the shop floor in the mid-90s. That was a big positive. But then 2004-05 onwards, when global liquidity increased and FIIs (foreign institutional investors) came in a much bigger way, then we saw some of the backlash from opening up.

At that time, a lot of business and industry which did a great job from the mid-90s to mid-2000s changed. They felt that manufacturing is a lot of hard work. You have to really work to get efficiency and productivity. There are easier ways to making money through arbitrage. So a lot of them started moving into getting resources. That was the time when the commodity cycle went up. So whether it was coal, 2G, real estate, that was where businesses went. So the system moved away from building a real business to arbitrage. And some of that is the reason for the pain we are seeing now.

So freedom is not about what one is free to do. Freedom is about doing what one ought to do. India took time to understand that with freedom comes responsibility. But I think we are getting there.

Would you say we lost the way a little after starting off in the right direction?

India has taken time to mature. And I think the linkage between politics and business is an issue that needs to be handled carefully. The real issue is the transparency required in funding of politics as well. That’s another very important reform process on which India has been slow to progress.

As far as your business is concerned, how critical has liberalization been in the growth of your business and what specific reforms have helped the most?

If you look at India as a photograph, it is always very challenging but the movie called India is beautiful. In Kotak’s case, it has been the whole development of private sector financial services that has shaped up. If you go back to 1980s, 97-98% of the system was controlled by the state. The only players who were reaping the benefits in the late 80s and 90s were the foreign banks. So opening up of the sector for private players made a huge difference for us. The liberalization allowing greater foreign investment has also been critical. In the mid-90s we were able to attract Goldman Sachs as our partner to build investment banking, securities and car-financing businesses. Such joint ventures were not allowed till the late 80s and early 90s. We recognize that in many areas we were like frogs in the well. We needed to see the world outside. That is what partners like Goldman allowed us to do.

Has liberalization of the financial sector done what its end goal is—greater economic development?

The issue about the financial sector is that it is a highly leveraged and volatile sector also. Therefore, good governance is the core to the financial sector. On that, I think India has made a lot of progress but governance is also a subset of the economy. It’s about how the economy functions, how the political economy functions. Therefore, a truly efficient financial sector is still in the process of evolution. And for that, we need a stronger governance of the broader economy combined with maturity to respect outcomes.

What is the work left undone?

We have made significant progress. But like a Bollywood movie, it is very long but I do believe that the movie has a happy ending. I think liberalization puts a very high responsibility on regulation and governance. So when you want to convert a jungle to a garden, it requires a significant mindset change. Some of that is what we need to be careful about and work on. So a lot of the low-hanging fruits have been picked. It’s the tougher part that is ahead of us. My view is transparency and focus on governance of the country should be priorities.

I also think the government should seriously think whether it needs to be in the business of business. Public sector should be focused on governance. I don’t know whether the political economy is ready but we should find ways of broad-basing public ownership of most of our public sector undertakings. And by that I do not mean privatization or handing over to a single promoter group. What I mean is—why does government need to own 51%? We should broad-base public ownership through the capital markets. Let the government come down to 25% across sectors.

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