Mumbai: Adil Zainulbhai is the head of McKinsey and Co.’s India operations. McKinsey has worked with some of India’s best known companies over the past two decades. Without divulging details of the firm’s clients, Zainulbhai spoke to Mint on larger trends he sees in India as it recovers sharply from the slowdown. In the first part, which appeared in Wednesday’s paper, he spoke about the state of the economy, and financing and management lessons Indian firms had learnt in the past year. It ended with him making a point about firms realizing that they couldn’t survive with a high degree of leverage. In this, the concluding part, he talks about specific sectors, the role of the government and the external view of India. Edited excerpts:

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We were speaking of leverage. Let’s talk about the real estate sector.

Real estate is a very important part of India’s growth story. If you look at construction—real estate and infrastructure construction—a huge number of unskilled labourers in India get jobs and make money from real estate. Many of them didn’t have any jobs (in the past year) and they went home to their villages, planted crops, they sat around. Now that the industry is picking up, millions of people are being put to work. So it (real estate) is actually quite an important part of the economy.

Sustaining growth: McKinsey India managing director Adil Zainulbhai says that if the government doesn’t allow the momentum in industry to slow, the country’s economy will be fine. Abhijit Bhatlekar / Mint

If you look at it today, the proportion of housing that is coming in, that is affordable housing, is much higher, and, fundamentally, that’s better for the country.

They (real estate firms) also made some mistakes. They built too many malls, which were not required, and too many office complexes. At that point, the idea was to build something and somebody would buy it. Going forward, hopefully, people will do more thinking on what actually makes sense and they will build that. The first signs are very promising. There is more affordable housing, all the crazy schemes at the edges have gone, the government is being smarter about who they are lending money to, or the banks are lending money to, and, hopefully, we will not have crazy boom that we had last time. The problem of a real estate boom is that it quickly becomes a real estate bubble. People start buying apartments and houses to flip them.

If the real estate companies are smart, having gone through a near-death experience, they will not repeat some of the mistakes they made last time, which was to over-leverage, building things and in places that didn’t make sense, over-investing in malls.

What about the retail sector? It is very closely related to real estate. And, much like real estate, it was expected to be one of the success stories of the boom period. It was this shiny new industry that was going to take India by storm, and lots of companies made huge bets on the sector. They expanded across the country and set up shops even in small cities. A lot of them had to scale back. What really is the future of organized retail in this country?

The future of organized retail in India is very bright. There is no question that the proportion of organized retail or proportion of the goods going to the organized retail over the next 20 years will increase dramatically. India is very, very low in terms of that percentage compared with China and the rest of the world.

If you look at the transition, it takes a certain number of years to get up to 20-30% (share of) organized retail and this will happen in India.

Now, individual companies within that will go through a natural cycle. Today, it’s not clear what the model for organized retail will look like. Everyone is trying out different formats, everyone is trying out different approaches, but we don’t know what will work.

In the US, it took many, many years after things started getting organized, for the formats to get finalized. Wal-Mart (Stores Inc.) really only started taking off in the 1980s. So I think, if people see, the same thing happened here. The exact companies and formats that will dominate? We don’t know what they are, we can’t bet on it today.

People are experimenting in a big way and you’ll see failures. I think the hubris around retail and the excitement about retail was a little ahead of where things actually were. We were in the mode of early-organized retail. Lots of experimentation gone wrong and at some point somebody hits upon the right formula in the expandable manner. I think organized retail will continue to grow.

The government was quick to respond to the slowdown with fiscal stimulus packages, but do you think the crisis has affected the government’s priority in terms of building infrastructure or creating the kind of regulatory environment that is conducive to sustainable growth?

It’s tough to think about the government as a monolith because there are many different views within the government and many different approaches.

The Reserve Bank of India and the finance ministry imposed similar packages and set of rules on Indian financial institutions that fundamentally helped the economy. These may have slowed down the efficient use of capital, but there was no question that it prevented problems in the Indian financial system. So I think all of those things had been done reasonably well.

The stimulus factor actually worked. If you look at the growth during the worst affected quarter, which is the January-March quarter, and then the April-June quarter, what you’ll see is that the area which grew the most was services, where the government helped quite a lot. It worked to the point that it got confidence back, that you got money flowing into India, and, as a result, now, we are in the virtuous cycle.

I think we put too much attention on reforms in certain sectors as drivers of the economy. The fact is that they may not be the drivers and those are not the most critical things to look at. For example, opening up the retail sector, I don’t think is the key.

I would say there is a certain momentum in the industry, and, if government doesn’t allow the momentum to slow down, it’ll be fine.

I think the second point I would make is on infrastructure. I think the government is dead serious and has over the period of 10-15 years realized that growth in infrastructure ahead of the economy is a good thing. For a long time, intellectually, people believed that the infrastructure should follow growth and I think now, by and large, everybody believes it should lead growth. Now, the issue is not in that, nor in money, but in the execution.

And that, particularly aspects related to land—it’s a disaster. In land acquisition, the land Bill was not passed and that, I think, is the political issue more than anything else and it has to get sorted out for infrastructure to grow dramatically.

Still, like all things in India, I am very optimistic about it. Many of these things will be immensely frustrating because they don’t move in a straight line, but they are moving forward. Even on land (acquisitions front), many things are happening and they will pick up, but it will be maddeningly frustrating.

In roads, it has now being six months since the new government has taken over, I think they have very aggressive plans, but on the pure execution level, the number of new contracts that have been given out is still low because of the land acquisition issue.

If you look at power, a lot of new plans have been announced, but the amount of new capacity coming on stream as yet is insignificant. But we may still get 100 gigawatt in five years. So it is frustrating, but it’s moving. (One gigawatt is equal to 1,000MW.)

What’s the external view on India? How do foreign investors and how do multinational companies that are either operating in India or considering entering the country look at India now?

I have an index—which is how many CEOs (chief executive officers) are visiting India from MNCs (multinational companies), and last year it dropped a lot. Starting around April-May this year that index has grown dramatically. I think the reason is very simple, which is that every MNC around the world looks at growth and they have seen that there is no growth in the US and Europe. They are convinced that the majority of the growth is going to come in India and China. So they are getting very, very serious about commitment to India and China.

If, in fact, we can make it even easier for people to put FDI (foreign direct investment) into India, we will see FDI not just at $25 billion (around Rs1.16 trillion), but more. Five years ago, it was at $1 billion.

If you look at many MNCs, they are putting big investments here, they are sending their top executives to India, they are buildings plants in India to supply to the rest of the world. If we don’t block it through some government or bureaucratic snafu or some tax, I think FDI will grow very, very dramatically.