Uday Kotak Warns of Fading ‘Animal Spirits’ and Challenges for India’s Economy

Veteran banker Uday Kotak has raised concerns over India’s economic future, warning that the country’s “animal spirits” – a term referring to entrepreneurial energy – are beginning to fade. According to Kotak, a growing number of young business leaders are increasingly focused on managing investments rather than building and running companies.

A Shift in Focus

Speaking at the flagship investor event Chasing Growth 2025, Kotak expressed his worry that the next generation of business families is taking an easier route. Instead of taking on the challenge of starting or growing businesses, many young entrepreneurs have shifted their focus to managing family offices and investments. Kotak explained, “They’re treating it as a full-time job, managing funds, trading in the stock market, and allocating capital to mutual funds.” He stressed that when someone sells a business, they should ideally be thinking about launching or acquiring another venture, not simply running a family office.

Kotak’s remarks highlight the potential long-term consequences of this trend, urging the younger generation to get back to creating operational businesses. “I want to see a generation that is hungry for success and eager to build companies rather than merely becoming financial investors early in life,” he said.

The Impact of Global Policies

Kotak also pointed to global economic factors that are making it harder for India to attract foreign investment. He called for a cohesive strategy from policymakers to counteract the “vacuum cleaner effect” of U.S. policies, which are pulling foreign capital away from emerging markets. Rising U.S. Treasury yields and a strengthening dollar are straining India’s current account, affecting exchange rates, and draining liquidity.

“The U.S. dollar is acting like a vacuum pump, sucking capital out of emerging markets,” Kotak said, adding that foreign investors are using high valuations in India to repatriate profits back to their home countries. This has led to exits from key players in India’s market, including companies like Whirlpool and Hyundai, who are reducing their stakes due to the high valuations.

Rising Risks for India’s Economy

India’s external account has three key components: Foreign Portfolio Investment (FPI), Foreign Direct Investment (FDI), and external commercial borrowings. Together, these elements make up a total capital stock of $2.5 trillion. However, with mounting capital outflows, Kotak raised alarms about the risk of a significant portion of this capital leaving the country.

“If even 5% of this $2.5 trillion were to exit, that’s a $100 billion outflow,” he warned. “In such a scenario, two things could happen – RBI could deplete its reserves, or the rupee could weaken. We may even see a combination of both.”

The Need for Strategic Response

To address these challenges, Kotak stressed the need for a unified approach from policymakers. The government, along with financial bodies like the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), must work together to craft a strategic response to the “vacuum cleaner” effect. Should India tighten domestic liquidity, or should the rupee be allowed to depreciate to absorb these external shocks?

Kotak’s call for a cohesive strategy reflects the gravity of the situation. India must take proactive measures to maintain its economic stability in the face of global pressures and internal shifts in business practices. The next generation of entrepreneurs may hold the key to India’s continued growth – but only if they are motivated to build and innovate, not just invest.