The India Growth Story is Still Good

Image: Vikas Khot

THE PANEL (From left) McKinsey India’s Adil Zainulbhai, AZB & Partners’ Zia Mody, ICICI Bank’s KV Kamath, CNBC-TV18’s Suresh Venkat, JJ Irani, former director, Tata Sons, and Blackstone’s Akhil Gupta

The exhilarating economic growth of the noughties (decade of 2000-9) infused great confidence in Indian business. India Inc grew stronger and went into new geographies looking for opportunities. The sheen has dimmed somewhat in the past two years as GDP (gross domestic product) growth slowed, and international realities started biting. More recently, gloom and doom conversations abound and there is concern around the policy paralysis in government. It is almost like unbound pessimism has replaced the irrational exuberance of five years ago.  

Forbes India has chronicled much of these ups and downs in the past three years. We decided to focus on whether the negative sentiment is becoming a self-fulfilling prophecy for India Inc.

We invited the high-powered jury members of the Forbes India Leadership Awards for a televised discussion moderated by Suresh Venkat of CNBC-TV18. The question for Jury Chairman KV Kamath and members JJ Irani, Adil Zainulbhai, Akhil Gupta and Zia Mody was: “Is our pessimism killing the India growth story?”

Here is the edited transcript of the conversation.

Venkat: Let me begin with the chairman of the jury, Kamath. It has been a tough year for corporate India. How has it been for you as a business leader?
Kamath: I look at events around me as mixed blessings. One positive is that we are still growing at a rate which most of the world would give at least one limb for.

Venkat: There has been a general slowdown on growth, but there has been a non-corresponding increase in pessimism—and that’s my question for Akhil Gupta, chairman of Blackstone—are we being unreasonably pessimistic about the slowdown of the India growth story?
Gupta: It feels worse than it is. I would say that India is in the best position, if you look at the large economies. In Europe, the best scenario you can think of is flat growth for the next five years. The US may be able to do 2 percent for the next 5-10 years, China is going to slow down and if China slows down, Japan is going to have a tough time—Southeast Asia, Australia and Brazil are going to have a tough time. The only country that has a structural strong story intact is India. So, I would say what we are facing right now is cyclical headwinds while our structural story is intact.

Our feeling is—why are we not doing better than what we are doing?  Five percent is a great growth rate for any developed country, but for a country at our stage of economic development, that’s not great. I won’t see pessimism. I think we are a little disappointed that we are not getting as much help from policy formulations and we are not taking reforms faster. We are not taking the next step.

Venkat: If the India growth story is intact, then why does everyone—the industry and government seem to be so pessimistic?
Mody: I think it is probably feeling let down of what could have been.

Venkat: We are at 5 percent and we could have been 10 percent?
Mody: Maybe not 10 percent but maybe much more than 5. I think that India Inc has a natural exuberance and when they feel it being dampened they probably get upset. So, it is the same animal spirits that everybody wants back, and I think there is a sense of disappointment of things that could have been better. Are we really succeeding despite ourselves? That, I think, is a mantra you hear quite often. So, often it spreads to borders beyond our subcontinent and then it sounds even more negative. If we are saying it then why shouldn’t the rest of the world? But I think there is a sense of ‘did we really have to do this to ourselves?’

Venkat: And we did this to ourselves, no two ways about it.
Mody: I think there is certainly a debate which would justify some suggestion that we did.

Venkat: Zia Mody spoke about animal spirits and our Prime Minister not so long ago said we need to reawaken the animal spirits. One of the things that businesses are talking about is the failure of governance, the trust deficit. How much do you think that plays a factor in our growth slowdown?
Irani: I think the nation is showing its frustration that we could be doing much better, more than 9 percent and so we are doing something between 5 and 6 percent. We have an added advantage that we have a population of 1.2 billion and, therefore, there is a tremendous capacity for internal domestic consumption and we are not that dependent on external factors. We could be doing a lot more within ourselves. There is, of course, a desire that the government should move on to the next phase of reforms and that is not happening. Maybe, in the next few weeks, we will see a positive change in that area. Let’s expect that, but I think it is not so much a matter of pessimism. It is a matter of frustration that the nation says we want to go ahead and the conditions are not allowing us to go ahead. Of course, when I say conditions, the gateway for that has to be opened by the policymakers.

Venkat: So, the political system has to set right those conditions and dismantle the barriers to growth?
Irani: Political and bureaucratic.

Image: Vikas Khot

Venkat: Let me go to Adil Zainulbhai—chairman of McKinsey India. There are some fears that the ‘I’ in BRIC [Brazil, Russia, India and China] could be soon replaced by Indonesia or Vietnam. Are those fears overstated?
Zainulbhai: Let me start by looking at why people are being pessimistic. Though GDP growth has slowed from 8 percent to 5.3 percent, industrial production has fallen much more and gone from 9.7 percent to 0.7. This is what industrialists and people involved in manufacturing, in industry are worried about. It is much more significant than the drop in the GDP.

The BRIC was a wonderful construct that was created. But it is not preordained that BRIC should stay as it is. There were many other countries that were considered and not put in there when that term got coined. There is nothing magical that says this fast-growth emerging market should be four or three or five. And, therefore, the term BRIC may not be as relevant going forward.

In terms of other countries that are very interesting, and we should all hope that more emerging countries emerge and grow faster, it is good for the whole world. So, the fact that if Indonesia, Vietnam, Turkey, South Africa, etc start doing well, that is terrific for everyone. That is not at the expense of anyone else.

The second thing, I would say, is, the whole world is feeling a little bit of a slowdown in different ways. The Chinese economy has slowed and the government there is very nervous about the outlook. It is, in fact, putting in place a very large stimulus. Brazil has slowed; Russia is dependent on oil prices. So, actually all of the BRIC, for different reasons, are slowing. It is not just India, all of them are and, perhaps, each one for different internal reasons is seeing additional slowdown. So, replacing one or the other is too simplistic. We should hope that there are 8-10 developing countries that are going to do very well over the next few years. I would rather say let us talk about countries that will join the 7 percent plus club rather than having an acronym that limits it to three-four.

Venkat: Kamath, you seem to be the last man who is bullish on the economy.
Kamath: I am bullish. Because if you look 10-12 years back—to me those were the darkest days for Indian business—when you had to reinvent yourself from 40 years. You had to build scale, cost effectiveness, and quality. And India Inc did it. They did it again in 2008. Indeed, people can stand up and all the problems can be sorted out. However, we need to keep in mind two or three things for this to happen. You have to drive the climate for investment and the climate for demand to arise. If people can’t afford to buy, you are going to stall demand in the first hurdle and that’s what is happening today—affordability has dropped dramatically and we need to address this. I think there interest rates become a key. The common man is burdened with EMI (equated monthly instalments), so that engine of growth is not firing as it did three years back.

Venkat: So, the India consumption story is not intact?
Kamath: Clearly, it is not intact. It is going on, but if there is no growth there why would you invest, so your investment cycle is also in a slow gear. The leg which could spur growth is infrastructure. There has been a dramatic slowdown in infrastructure investment.

Venkat: On the government side, on the private side, on the PPP (public-private partnership) side?
Kamath: On the private side if I look at what banks were doing I would say that infrastructure offtake has come down to maybe 25 percent of what it was just two or three years ago.

Now, we need to look at what are the things that are needed to spur that investment happening again, starting with power, roads. The immediate bottleneck appears to be power, I think infrastructure inputs we can manage, but we need to get the power situation addressed. Within that, the immediate impediment is coal. We need to get this unclogged because that will help us push 20,000 MW of capacity, lying virtually unfired. So, that’s the first step that we need to take to get infrastructure going. I think the animal spirits of businessmen do not take too long to awake, they are hypersensitive.

Venkat: Akhil Gupta, there was no significant difference in governance in UPA-I than there is now. The same paralysis that existed now existed then. Yet the Indian economy boomed—was it due to great leadership in corporate India or were we simply lifted by a rising global tide?
Gupta: There are two factors. In the first UPA, we had the benefit of reforms that were done in the previous regime. What we are seeing today, is that the effect of what was not being done in the last five years. Also, the global situation today is much worse than it was during the UPA-I and India is vulnerable to this. If the world doesn’t finance our deficits we have liquidity constraints. So, I think partly what is happening is that because of inaction we have made ourselves more vulnerable to the global instability. If we had strong leadership and I think that’s where some of the frustrations are—this was really our moment.

Venkat: Have we missed that moment entirely?
Gupta: Nations don’t have only one or two years.

Venkat: Given the current state of our democracy and the state of our political establishment, when elections come in 2014 do you see a significant shift in political ideology or political governance in the country?
Gupta: Worldwide, you see democratically elected leaders are failing to do the right things. This is because right things mean short-term pain and long-term gain. So, most of our leaders are worried about the next election rather than doing the right thing.

Image: Vikas Khot

Venkat: Every time a corporate leader takes a long-term decision, which is going to impact his company in the short term, that leader is pilloried. Are corporate leaders guilty of this flaw?
Irani: That is given to us because of our historical background. Twenty years ago, who was asking for quarterly results? Nobody and now we have this breed of analysts and financial planners and so on, and 50-60 TV channels and people are thinking about what is to be done this month, three months later, forgetting what should be done for the five-year programme. I am very proud to say that there is one group in our country which refuses to give any forecasts, quarterly results or six-monthly results or annual results. I think what we need to do is to think of the country as a whole. What are we likely to be in five years?

Of course, certain situations have exacerbated this problem. The one most important is the question of land. Land has become a key subject now. Infrastructure is the other. I think the politicians at the top must cut across issues and take decisions which will be beneficial three, five or 10 years down the line.

Zainulbhai: As Montek [Singh Ahluwalia, deputy chairman, Planning Commission] has said, ‘No country has the god-given right to grow at 9 percent’.  You have to work hard for it. But when we were in that phase—corporate chieftains, the government, bureaucrats, everyone took it for granted. You have grown at 9 percent for three-four years, but not for 20 years. So, just take it a little easy. But I think we do have that tendency and perhaps today the same thing is being applied in reverse. We have got the year of 7 percent growth, we are looking at a year of 5-6 percent growth and all of a sudden we are, perhaps, getting too far behind ourselves. The underlying economy hasn’t moved that much, but our mood does swing and maybe that’s a great strength in many times and that’s a great weakness—we should just accept that it is what it is.

Venkat: You work with a lot of corporate leaders as well. What goes up in the mind of a corporate leader when they get into this irrational exuberance mode or this all-pervasive gloom? Should the leader be calm and stable through time, though trials, through tribulations?
Mody: Many are. I don’t think we can characterise them broadly like that. But when we were growing and India was brilliantly shining, there was a lot of ‘me too’. If somebody went abroad and did an acquisition I want to be there too and that was good.

Venkat: How much of that is driven by vanity and how much by business logic?
Mody: We will see. But in terms of gloom, I think it’s more the fear. Should I invest in this country? Should I look elsewhere to put my capital? Will somebody in the system get arrested rightly or wrongly? So, I think these are the factors that hold people back. It’s just life.

Venkat: There is a saying that the time to buy weapons for war is during peace. Did corporate India buy enough weapons during the years of 9 percent growth that they can use now?
Kamath: Indeed they did. What are the weapons that they bought? If you look at the last 10 years, many entrepreneurs have cleaned their act and got the balance-sheet right, got debt down, changed cost equations. They have built scale, become globally competitive, many could go out to acquire companies and turn them around. By and large, every Indian company that has gone abroad is because of hard work. These were the weapons they bought, using the dividend from the growth. When we look at 9 percent we are exuberant, yet when we look at 6 percent we are depressed. To that depression you add what you get from the media. Then you get depression from the people who analyse you and so on and so forth. So, it just builds on itself.

We need to ignite something which casts a ray of hope. I think it’s going to happen. Just as 9 percent was not permanent, 5-6 percent, or whatever is that number, is not forever either. I think things will correct. When that ray of hope is lit, you will see things bouncing back.

Venkat: How do you think this trust deficit can be fixed?
Gupta: It’s all leadership. A few good leadership actions can change everything. The sentiment can turn because the fundamentals are there. We just need that catalyst and to me it can only be leadership.

Venkat: Are you optimistic about the political class in India, the next wave of leadership that’s going to come in 2014?
Mody: I would be cautious.

Venkat: Why would you be cautious and what would turn the caution into optimism?
Mody: I just think, seeing the present landscape, we are concerned about a fractured mandate. These lead to political compromises which are the name of the game in order to get the government going. So, it would be wonderful to have a very strong leader who could cut through….

Venkat: Anybody you think is a potential leader?
Mody: Now, I am going to play safe.

Venkat: It’s not going to be one Mr Gandhi junior for certain it seems.
Mody: I think there are many options and each one comes with a pro and a con, frankly. I think that the struggle that I and many of us will have is that we just don’t have one or two names that we can say, “Of course!” and that is really the tragedy.