We have witnessed a dramatic transformation in the Indian economy in the past few years. India has, for the third year in succession, recorded a GDP growth rate of more than 8%. It is estimated that the growth rate is in fact in double digits, if one were to update the indices currently used to measure GDP growth.
This means that India is today the world’s second-fastest economy in terms of the growth rate.
The experience of some other major Asian economies shows that this high growth rate is indeed sustainable over very long periods of time. Japan grew at 8.5% for 20 years after World War II. The result was a five-fold increase in its GDP. China has grown at a compounded annual rate of 9.5% for over 25 years since it began reforms, with its GDP growing by 10 times.
The Indian economy today has the same characteristics as the economies of Japan and China had in the early years of their growth—favourable demographics, human capital, rising competitiveness of industry and an increasing savings rate. India is at the beginning of the curve in terms of what could happen.
We can reasonably expect these growth rates to sustain for the next 15-20 years.
While there are striking similarities between India currently and the early growth periods of China and Japan, India has seen a completely different growth paradigm. While China and Japan started out as manufacturing destinations, India’s growth process has been powered by knowledge sectors. This can be seen in the fact that the services sector has grown at an average rate of 9% since the economy was opened up in 1991. This is now extending from technology services to medical research, health care, biotechnology, design and other knowledge-based sectors.
The knowledge sector does not require large capital investments. It is important to understand that this is a new economic reality, which draws its sustenance from the power and momentum that our people provide. Growth in these sectors has resulted in rising household incomes and stimulated growth in consumer demand, which has in turn provided the impetus to industrial production.
With the knowledge economy demonstrating sustained growth and the real sector doing equally well, we are not just competing globally, but are also going out and acquiring companies abroad. Today, the mantra is “seek beyond your borders” in areas where one has competitive advantage. A parallel trend is the growing number of international companies choosing India as a global manufacturing and sourcing hub. They have clearly seen India’s advantages as a manufacturing base.
While these growth engines that we talked about—the consumer cycle, the momentum in the services sector, and the resurgence of the Indian industry—are still revving up, these are not the only sectors that will provide the growth momentum in the coming years. I believe we have another area where we have huge opportunities: Rural India.
This region has a population of approximately 700 million spread across 600,000 villages where the opportunity exists. The ability to do business in rural India is improving dramatically. Villages that were hitherto unconnected are getting connected through the shifts in technology.
This paradigm shift in technology will cause the next transformation and give us the next engine of growth. Increased access to financial services is a key requirement for uplifting the economic status of rural households.
Farmers need credit not only to cultivate crops, but also for buying equipment and financing the holding period of output post-harvest. They also need insurance to guard against climatic vagaries. Traders and entrepreneurs need not only credit, but also efficient-transaction banking services. And even the poorest of the poor need not only micro loans to enable productive activity, but also savings accounts to manage the small surpluses arising out of such activity and insurance to protect households against economic shocks like accidents that lead to loss of earning capacity.
The opportunity in rural India now also includes connecting rural India to better markets with better prices. We at ICICI Bank have committed ourselves to these growth opportunities and are offering a full spectrum of products to meet the needs of various segments of the rural population through a combination of innovative channels. We are seeking to use technology to address the challenges associated with delivery of financial services in rural areas.
While the growth momentum is without question, there is a need to continuously plan ahead for the resources needed to support this growth. For example, growth in the services sector has brought with it the demand for skilled and qualified manpower. According to Nasscom, the IT and ITES industry itself will face a shortage of half-a-million trained people by 2010. The issue is no longer about finding jobs for people, but of ensuring that there are enough people with relevant skills for the jobs at hand.
The other key challenge we face is the lack of infrastructure. Power, airports and ports, urban rejuvenation and rural infrastructure are all areas where the current facilities are inadequate to support the growth targets that we have set for ourselves.
We must be ready with solutions to these challenges. These include public- private partnerships to build up infrastructure, expanded access to primary, secondary and higher education and reorientation of curricula to meet the needs of the knowledge economy. While we may not have transformational one-shot reform in these areas, initiatives must be undertaken to address these issues in a calibrated fashion. We must also encourage each region of the country to map its strengths and opportunities and leverage these for growth and increase in regional per-capita income.
This will ensure that India sustains high growth rates over a long period, with the benefits of growth spreading across a greater proportion of our people.
K.V. Kamath is managing director and chief executive officer of ICICI Bank.