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‘12-15% wage hikes will make us uncompetitive’

‘12-15% wage hikes will make us uncompetitive’
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First Published: Thu, May 01 2008. 10 58 PM IST

Taking charge: K.V. Kamath, the newly elected president of CII, addresses his first press conference in New Delhi on Thursday.
Taking charge: K.V. Kamath, the newly elected president of CII, addresses his first press conference in New Delhi on Thursday.
Updated: Thu, May 01 2008. 10 58 PM IST
New Delhi: Raging inflation and deepening credit curbs are the economic backdrop against which Kundapur Vaman Kamath is taking over as 2007-08 president of the Confederation of Indian Industry, or CII, the nation’s main industry association. As managing director and CEO of ICICI Bank Ltd, Kamath has spearheaded the lender’s transition that has made it India’s second largest bank by assets and its largest private bank. Kamath says he remains optimistic about the Indian economy, saying that “we cannot take our eyes off the 10% growth target”, even as he agrees that, among other things, wages across companies must come down to reflect current realities. Edited excerpts:
You have come in at a time when the economy is losing steam and facing a lot of challenges. Also, how big a threat is inflation to the economy and the financial sector?
Taking charge: K.V. Kamath, the newly elected president of CII, addresses his first press conference in New Delhi on Thursday.
I believe in the theory of constraints. The more constraints you have, (the more) you end up doing better. My own view is that as a country, we are set for an aspirational growth of 10%. The current scenario indicates that it is slowing a bit, probably by a percentage point or one-and-a half. It would have been worse if the corporate numbers had started moving dramatically south in the last quarter. That hasn’t happened. I’m not seeing negativity, though there’s no trying to argue that nobody has been affected (as) certain sections have. Overall, I think growth remains on track. We may fall a little bit short, but not dramatically.
Very encouragingly, that’s exactly the same message we’ve got from the Prime Minister downward, that ‘please do not upset the growth engine’. The second message is ‘please ensure it (growth) is equitable and inclusive’. We will work on this as we go along. If we are looking at a sustained growth of 10%, the financial sector will need to grow at 25-30%. We have to ask ourselves if we are geared for this kind of growth and, if not, what is it that we need to do. I’m optimistic that in a challenging context, given the momentum, given that there’s been no slowdown, given that there is a large pipeline of investable projects—and I don’t see any slackening from the number of $700 billion, or Rs28.35 trillion, (of investments).
On the inflationary front, I clearly see this time, a message that while inflation has to be fought, we have to ensure that growth is not pushed off-track. There’s an understanding that if we push growth off-track, getting it back on track is going to take a long time and as a nation, we can’t afford that. And, I’m seeing action, which is prescriptive on all three fronts—fiscal, monetary and supply-side. This medicine is being given appropriately. In the monetary policy context, the medicine that is being given was: create heightened awareness. There is inflationary risk, articulate it clearly, and give an indication that policymakers are ready to act. But, we will not touch interest rates right now, because it will affect the growth engine.
The RBI governor said he might go in for another 25 basis points hike in the cash reserve ratio. Will that put pressure on rates?
The market today is so comfortable that it’s again a policy stance that’s being articulated. That, we’ll ensure that liquidity is just right without it going over. I don’t, at this point, see any situation. If corporate numbers had slackened by 5%, then I’d be worried. Then it would upset the $700-billion investment plan, the funding of it, and it would upset the equation in terms of the debt funding for that. That would have given us a liquidity shock. But at this point, I find it comfortable.
How do you then view the year for the financial sector and your bank?
I’m a bit more optimistic. As for the US situation, what was thought to be a definite recession has turned out a marginal growth. For the next two-three quarters, the US seems to be on a firm footing. Frankly, there is no impact at all on the domestic financial market. Lot of liquidity, enough growth drivers. If a bank is only going to be in consumer credit or corporate credit, yes, they’d be impacted. But a bank that has a wide range of operations would be able to better manage the year. The challenge is not that there’s no demand, but that the demand is restricted to certain sectors. The question that needs to be asked is: Are we geared to meet the challenges of 10% growth? I don’t think we are. Are we deep enough, wide enough, products, structures, so on? Then, we will understand why we are hearing voices saying there should be consolidation or build scale.
Durable goods and auto makers are complaining about lack of funds, leading to a face-off with banks. How will you look at it, as a CII chairman or a bank chief?
I think we have to tackle this issue head-on. There are two or three challenges that have to be articulated clearly. Part of the challenge is on the interest front. Manufacturers are not wrong. This is a major reason for the slowdown in the auto industry. There is little that the banking sector can do unless, first, the signalling is that ‘yes, you can now move one notch down and that the liquidity permits you to do that’. Until that happens, no prudent banker is going to move down.
But the purpose for raising rates was to slacken demand. Credit is ready to flow, but there is no offtake. We have impaled affordability and that was done with a purpose. The banks are only the means of translating those signals. With the housing industry, the primary problem is the runaway price of space, which has increased 100-500%, while interest rates have moved up from 8% to 11% only.
Another area where there is a face-off between manufacturing and financial sector is the derivatives problem. What is your view on that?
I’ll speak only as CII chairman. In the course of last six weeks, the currencies have moved and that has created a problem as contracts are over a long period. We have to look at what happens and how it plays out. This is between the banks and the companies. There are ways to resolve this.
In the context of the PM’s call for the need for sobriety, is this really the role of the private sector?
The need for controlling the wage increases was the context this time and I appreciate it. Wage increases of 12-15% year-on-year will make us all uncompetitive. I salute the knowledge industry for taking a step to cut down, and we are following in line as a bank, saying that even the financial services business should be ready to take a cut and move ahead. Otherwise we will fritter away our gains from building up competitiveness.
ravi.k@livemint.com
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First Published: Thu, May 01 2008. 10 58 PM IST
More Topics: CII | KV Kamath | Industry | Growth | Wage Hikes |