Mumbai: The Indian economy has recovered its growth impulses faster than most other major economies of the world.
ICICI Bank Ltd chairman K.V. Kamath believes that India is in the early stages of a long boom that is perhaps more powerful than what is captured in the usual economic data. Kamath said in an interview that India should use its growth momentum to innovate, create jobs and build infrastructure. Edited excerpts:
The economy has done very well in the second quarter. Is this growth rate sustainable?
Positive outlook: ICICI chairman K.V. Kamath says India’s hand has grown stronger after the recent crisis. Abhijit Bhatlekar / Mint
I believe our growth rate is eminently sustainable. The experiences of Japan, South Korea, Taiwan and the countries of South-East Asia show that economies grow very fast for between 20 and 25 years. We are only in the fifth year of such high growth.
The anecdotal evidence suggests that growth at this stage tends to be in the double digits. The underpinnings of such growth are there because of the high savings rate and our balanced growth. In fact, our nation’s hand has grown stronger after the recent crisis.
Are Indian companies ready for a new growth spurt? How have things changed from 2002, when the previous slowdown faded away?
One important change over this decade is that the corporate sector has built up scale. The other is that companies have strong cash flows. Most brownfield expansions can be met by cash flows today. For example, cement companies will double capacity in the next few years without significant borrowing.
Greenfield projects, especially infrastructure, cannot be funded through the internal cash flows of companies. They will need leverage of between one and three times.
Are you concerned that bank credit growth has been sluggish?
The data is a bit misleading. The sharp drop in commodity prices over the past year means that the value of inventory that companies hold has halved. So, funding has come down pro rata. And I have already mentioned how infrastructure is the only area where banks are significantly lending.
You have often made the point in previous discussions we have had that the full extent of changes in India is not necessarily captured by the standard data. Is this true at this point of time as well?
I recently called four of our group economists to ask them about what they thought about economic prospects. I also asked them how many of them had gone around and seen first hand what is happening in India. Most had just sat at their desks and worked with numbers. We need to capture grassroots change in our analysis and not just depend on simplistic modelling.
India’s per capita income is now around $1,000 (Rs46,300). There is enough evidence from other countries that shows that there are tipping points when countries cross certain income levels.
You may remember that the entire basis for refocusing the bank on retail lending in 1999-2000 was that India’s per capita income had crossed $500, a tipping point for aspirations and consumption. Now, we are at another tipping point. There are usually dramatic improvements in infrastructure when average incomes are between $1,000-2,000.
I will give you a few personal examples. I recently drove from Worli (in central Mumbai) to Vapi (a manufacturing town north of the financial capital). There were only four or five signals in the 40km it took me to drive out of Mumbai.
Sure, things could be even better, but infrastructure is falling in place.
I suggest that you go take a look at the new access roads being built for Mumbai airport.
Now India is not a uniform block of people. I think there is a large mass, say around 500 million people in rural India and middle India, who are migrating from $500 to $1,000 (of average incomes). They are entering the consuming classes.
Then, there are people with average incomes of $1,000-2,000 that are keen on a better quality of life, including better infrastructure. The super rich are another category altogether.
There is still the issue of mass poverty and the crisis in agriculture.
That is a top-of-the-mind issue for this government. The current problems in agriculture will cause systemic pain and it has to be alleviated. But the macroeconomic impact is not material because there are other growth drivers that are pushing for growth. The human pain that is there because of the failure of the crop this year has to be addressed, however.
This government is serious about inclusive growth and has funded programmes such as the rural jobs scheme. But the only long-term strategy to create inclusive growth is to ensure job creation so that people can shift from low-productivity farm jobs to high-productivity jobs in industry and services.
We need to create 10 million jobs a year and this should be a top-of-the-mind issue for us as a nation. I think the strategy should be to create two to three million jobs that will create linkages for the other seven to eight million jobs.
One white-collar job creates about three-four jobs to sustain it. So, I would concentrate on creating white-collar jobs in industries such as IT (information technology), financial services, telecom, retail and travel. The problem is that potential workers need to have the requisite skills. We know that the IT industry is doing its own skilling work since the skills are not taught or inadequately taught in the official education system.
More can be done with partnerships between the government and business. Whoever I talk to today, this is my main subject.
To me, the more difficult challenge is for the other seven to eight million jobs.
Would better rural infrastructure also help?
The rural roads programme has brought about changes that have not been adequately appreciated.
The apple farmer in Himachal Pradesh can bring his fruit faster to market, cutting five days of travel time and cut wastage.
I recently drove around in Coorg district. Every second or third home has a home stay.
Urban families come here and stay with local families. This is one example of how the rural roads programme has injected money into the rural economy.
What role will innovation play in both meeting consumer needs and driving economic growth?
The new growth paradigm is driven by innovation in the 5-15-year horizon. We are just starting off.
Indian companies have driven down costs in industries such as telecom, banking and manufacturing. There is the Nano example. This process will happen elsewhere, because we now have scale and lateral thought is being used to meet the needs of a large market.
We should also take advantage of what I call the democratization of knowledge. Access to knowledge is virtually free, other than a few patents.