- India's Future Growth Trajectory
Amid Worries of a Slowdown, Charting India's Future Growth Trajectory
Published: January 19, 2012 in India Knowledge@Wharton
India's growth trajectory has been losing some direction recently, a victim of political bickering and an economic slowdown. Instead of the double-digit GDP growth once predicted for 2011-12, projections have been scaled back to around 7%. Though concerned about the deceleration, Indian business leaders attending the recent 16th annual Wharton India Economic Forum (WIEF) in Mumbai remained upbeat about the country's long-term potential. They also offered suggestions about how the country could regain some of the lost momentum.
The theme of this year's conference, the first WIEF to be held outside Philadelphia, was "India: 20 Years of Liberalization." Keynote speaker K.V. Kamath, chairman of ICICI Bank and Infosys, said that the current slowdown was a temporary problem. Tracing India's growth over the past two decades, Kamath pointed out that India's inherent strengths, such as its relatively young population, large domestic market and strong information and communications technology industry, will help lead to a speedy recovery. He added a caveat though: While these growth drivers are self-sustaining, policy reforms are critical to speed up that expansion.
Kamath noted that two key building blocks of India's future are equipping its people with the skills they need to be employable and financial inclusion. "People are at the center of our growth model," he said. "Our ability to meet their aspirations will determine our success. Otherwise, it can create significant social unrest."
Vinod Rai, chief comptroller and auditor general of India, pointed out that India is going through a crisis of governance that needs to be addressed with utmost urgency. Policy-making in Delhi has nearly come to a stop because of an anti-corruption movement. Bureaucrats and politicians are afraid of taking decisions in case they get hauled up later. But like Kamath, Rai put his faith in the country's fundamentals. "We are a vibrant, practical democracy, which has delivered," he said. "Our institutions have stood the test of time." On the economic front, Rai suggested that the worst is over for India. A 7% growth when many other parts of the world are growing at just 1% or 2%, he noted, bodes well for the country.
What Ails India?
During a panel discussion on "Financing the Growth of India," moderator Surjit Bhalla, chairman of OxUS Investments; Chanda Kochhar, managing director and CEO of ICICI Bank; Gunit Chadha, CEO of Deutsche Bank India; Ravi Narain, managing director and CEO of the National Stock Exchange, and Lalit Jalan, CEO and director of Reliance Infrastructure, debated the factors that have derailed India's growth trajectory.
With a growth rate of above 8% for over eight years, India has been second only to China. But in the past 18 months, the growth rate has steadily declined from 9.4% in early 2010 to 6.9% in the last quarter of 2011. Panelists predicted a 7.5% growth rate for India in 2012-2013, and suggested that inflation would drop.
Most of the panelists blamed politicians and the bureaucratic corridors of New Delhi for the country's apparent economic slowdown. They pointed out that India's business community was unwilling to invest large sums for future growth because of the slow and uncertain decision-making environment. Bhalla noted that back in 1975, an economist dubbed India a "knowledge-proof economy". "Does evidence play as large a role in policy making in India as it does globally?" Bhalla asked. Jalan proposed a new ministry of infrastructure and a "single window clearance" for key projects to minimize delays. Kochhar, however, was skeptical about adding to the bureaucracy. Instead, she emphasized the importance of making decisions at the micro-level and dealing with the intricacies of issues and projects one at a time. "It is time for the [Reserve Bank of India] to get into CRR [cash reserve ratio] and [interest] rate cuts," she said. Narain's prescription for restoring investor confidence was simple: A consistent set of rules that are reasonably stable and which don't discriminate.
In a session on housing moderated by Luis Miranda, chairman of the board of advisors at the Center for Civil Society, Keki Mistry, vice chairman and CEO of Housing Development Finance Corporation, and Niranjan Hiranandani, chairman of the Hiranandani Group, discussed the future of the sector in India and the need for more affordable dwellings. "Affordability will happen if the shackles are removed and this sector is allowed to grow like in the case of telecom, aviation and automobiles," Hiranandani pointed out. Mistry agreed, noting that in Mumbai, for instance, 57 approvals from different agencies are needed to construct a building. "To increase the supply, one needs a facilitating environment," he said. "This sector needs to be deregulated and have a single window clearance." The speakers added that a change in interest rates does not have a significant impact on purchase decisions; it is more important that other infrastructure, such as transportation, education and health care facilities, be improved in order to make housing in the suburbs an attractive proposition.
The Entrepreneurial Track
A facilitating environment and a robust ecosystem were also seen as being critical to boosting entrepreneurship in the country, according to participants in a panel on entrepreneurship moderated by Sandeep Singhal, managing director of Nexus Venture Partners. Panelists also shared lessons and insights from their own journeys.
Manish Sabharwal, co-founder and CEO of TeamLease Services, who started his career in pre-liberalized India and then moved to the entrepreneurial track, noted that this is a great time to be an entrepreneur in India. "What's happening in India isn't once in a decade or once in a millennium," he said. "It is a once-in-a-lifetime opportunity of a country." According to Sabharwal, the biggest differentiating factor of doing business in India is that one can avail of the unique confluence of doing well and doing good. "The question in India is not what is to be done, but how it is to be done," he added.
Sandeep Murthy, former CEO of Cleartrip.com and currently a partner at Sherpalo Ventures and India head at Kleiner Perkins Caufield & Byers, pointed to the nonprofit sector in India as interesting ground for entrepreneurship. "The NGO work is done sub-scale. One needs to see how to scale that effectively, and create a profitable model around it," he said. Gautam Gandhi, head of new business development at Google India, suggested that in India, the journey of being an entrepreneur is not as respected as it is in the U.S. "We need to celebrate, respect and reward the journey, and not be focused only on the end result," he noted.
Most of the panelists agreed that the biggest change in the entrepreneurship ecosystem in India is the ease of funding. Kunal Bahl, co-founder and CEO of SnapDeal.com, who has received US$50 million from investors in the past 18 months, said: "If you are a smart entrepreneur, really passionate and doing it full time, you will find someone who will write you that first check in a relatively short period of time." The panel also discussed the emergence of "angel investor" groups in India that are fast replacing venture capitalists for first-round financing. But Gandhi cautioned that there is a degree of "irrational exuberance" in the market and that he is "still not seeing innovation happening in India."
The Private Route
Panelists in a session on private equity moderated by Sri Rajan, managing director of Bain India, were largely upbeat about opportunities in the country. Naveen Wadhera, director and country head of TA Associates, noted that "with valuations getting more realistic, it is an interesting time to put money into India." Manish Kejriwal, managing partner at Kedaara Capital, called the next two years the "golden age for private equity in India." But there also are some lingering challenges. Sandeep Naik, co-head of Apax Partners India, pointed out that company leadership doesn't understand the value that private equity players can bring to a firm, and they also don't understand the term sheets. "India is a very difficult market," he said.
All panelists were unanimous, however, that the days of momentum investing are over. Differentiation, trust and alignment will be critical to PE's success, they said. Firms will also need to provide financial skill sets, strategic thinking and a global outlook to their clients. "The current environment will separate the men from the boys. It's going to be an interesting test of our propositions," noted Nainesh Jaisingh, managing director and global co-head of Standard Chartered Private Equity.
The conference concluded with R. Gopalakrishnan, director of Tata Sons, and Ajay Piramal, chairman of the Piramal Group, discussing the outlook for the conglomerate structure in India. The discussion was moderated by Karan Singh, partner at Bain India. Both panelists pointed out that apart from the U.S. and Western Europe, conglomerates are the norm across the globe. The tendency to think of the U.S. and the European model as being superior, they said, is because most business literature is very Western-oriented.
"There is a reason why, in countries like India and in other developing nations, you have conglomerates," Piramal noted. "It's because we still do not have a well-defined legal system or a transparent credit appraisal system. In such an environment trust or the brand name makes a lot of difference. And the name holds [value] across sectors." Gopalakrishnan dismissed the suggestion that sustained value creators in India had been largely single-business companies. Comparing a conglomerate with an LED light he added, "The way to build sustainable conglomerates that can compete with global companies is to construct our corporations or institutions in a way that there is focus [on individual businesses] and yet it's [also] a conglomerate."
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