The India growth party has just only started: Kamath

The India growth party has just only started: Kamath
28 Dec, 2007, 0521 hrs IST,KV KAMATH MD & CEO, ICICI BANK ,

India has made remarkable progress during the last 60 years and is viewed today as a land of opportunity. For the first time since independence we are at such an exciting stage of development. We are seeing the advantages of economic empowerment consequent to the transition to a high growth phase.

The trends that we are witnessing today are unprecedented in the nation’s economic history. The experience of other economies shows that a high growth rate of 9% or more is indeed sustainable over long periods of time. Japan grew at 8.5% for 20 years after World War II.

The result was a fivefold 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 ten times.

The Indian economy today has the same characteristics as the economies of Japan and China in the early years of their growth: favourable demographics , human capital, rising competitiveness of industry and rising 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. The party, in other words, has just started.

A look at the structure and growth drivers of the economy reaffirms this outlook. The growth momentum in the initial part of this decade was primarily led by the services sector . This sector brought to the fore the knowledge capital and entrepreneurial ability latent in the Indian people. Knowledge has emerged as the key driver of our economy today. While the services sector continues to thrive, the industrial, and particularly the manufacturing sector, has in recent years kicked in as a powerful growth driver.

Currently, India’s manufacturing growth is amongst the fastest in the world. India’s manufacturing base is the fourth largest globally. What has made this possible? With 69% of the population being less than 35 years of age, economic growth has spurred sustained consumption demand. The momentum in consumption demand has in turn accelerated the industrial and manufacturing growth process.

At the same time, growing global competitiveness has enabled Indian industry to develop India as a global sourcing hub, and also encouraged our companies to go out and establish a presence overseas, whether organically or inorganically.

As we have progressed from a per capita income level of $500 to $1,000, we have seen a rapid increase in the consuming class in the country. A per capita income of $1,000 marks the next step-up in the growth path. It is estimated that the increase of per capita GDP has added about 90 million people to the Indian consuming class.

At this level of income there is a distinct demand for better living standards and with increased affordability , large-scale infrastructure development becomes a reality. Going forward , as we move towards a per capita income of $1,500 and then $2,000, we will witness a rapid acceleration of this process. This will be a key factor driving consumption momentum and the consuming class of our population will expand exponentially in the years to come. On the other hand, the resurgence of investments in the economy will accelerate the industrial momentum .

Already we have an estimated capital expenditure and infrastructure pipeline of $500 billion over the next few years across a range of sectors. The healthy savings-investments balance that we witness today is a strong indicator that such investments can be easily financed. In essence, we are in a phase where both consumption and investment demand mutually reinforce each other to drive economic growth. As each of these factors continues to gain in strength, we seem well poised to take our growth story to the next higher level.

Can any element stop the party? Let us take oil prices first. The rapid increase in global oil prices to $100 per barrel has raised questions on the possible impact on the economy . Naturally earlier periods of oil price shocks are cited in most predictions of economic disaster. The key word here though is shock. The oil price increases preceding the current one were a result of an abrupt disruption of supply. Such disruptions were not easy to predict and affected the economic environment adversely. In contrast, the current increase in oil prices is driven by surging demand from emerging markets , which itself is an outcome of the growth process.

In recent years oil prices have remained volatile but economic growth has remained strong. In the Indian context also, strong economic growth has the capacity to absorb increased oil prices. As a comparison , while the net oil import bill for India increased by $5.6 billion in fiscal 2007, GDP growth at market prices was well over $100 billion.

The interest rate cycle in India has reversed after witnessing a period of low interest rates. However, I do not see high interest rates as a threat to growth. The monetary measures appear to have had the desired impact and with inflation under control and liquidity being comfortable, interest rates should come down in the future. The strong appreciation in the rupee has led to concerns regarding adverse impact on export competitiveness . However, I would like to point out that an economy attracting capital on account of a strong growth outlook should be prepared to face appreciating rates. Rather than depend on exchange rates and government interventions, I am sure that our industries have the capacity to remain competitive by improving efficiency.

Over the past few months, conditions in global markets have deteriorated and there are now concerns surrounding a downturn of the US economy. Credit markets have tightened owing to a loss of confidence among investors . Financing continues to be available for Indian credits and going forward liquidity conditions should ease following the re-pricing of risks in global markets.

The Indian growth story is based on multiple cylinders — consumption, investment, domestic demand, global competitiveness , knowledge-based businesses, industrial growth. Cyclical downturns in any one sector can occur but it is the combination of all factors that will keep the economy running at the rates that we are now seeing. In addition, there is ample scope to do much better , be it in the agriculture sector or in terms of infrastructure development. There are a lot of growth stories waiting to happen. As such the risks we see do not seem to have the potential to derail the economy . The party, as I said earlier, is going to be a long one.


The author is managing director and CEO of ICICI Bank