Aditya Puri, chief executive officer and managing director of HDFC Bank, feels the country is likely to see significant policy momentum soon. Directionally, this would mark a momentous shift, he tells Ridham Desai of Morgan Stanley in this interview, reproduced here with the research firm’s permission.
What is your view on the Indian economy? Where are we heading?
First, we must understand India. We need to be on the same page for me to answer this question. India is an incredibly diverse country - religion, politics, education, geography, weather are all different across the country. We have the characteristics of a rich country as well as a poor country. Thus, we have the largest scooter manufacturer in the world and globally efficient steel plants and, then, we also have a large portion of our population below the poverty line. We have a lot to do but let us not forget that there are multiple ‘Indias’. There is lot of talk of governance from corporations to politicians - my view is that human frailty is not the monopoly of India. This happens all over the world. Maybe we shout a bit more and maybe have a bit more petty corruption, but none of this is unique to India. Of course, this does not mean we do not have to rectify it. People also say the Indian political class is very bad.
Let us understand that other countries may have to learn from Indian politics of how to manage a democracy when the cake is not large enough. Other democracies may go through this situation in the years to come.
Don’t let these temporary factors which I call the noise of a democracy in transition cloud your judgment about the vibrancy of India. I feel RTI (right to information) has proved to be excellent for the country. India’s problems are not unknown. The difference is that they are now being discussed on live television. However, this is leading to improvement. For example, which country has seen government-empowered ministers in jail, entrepreneurs in jail and bureaucrats on the docks? We are now introducing the Lokpal bill. I feel that our nadir is behind us.
Now that we are on the same page, I believe, that even if we do not solve our problems, we can grow at 7.5-8%. However, that will be foolhardy on our part. We have the potential to grow at 10%. Why? We are growing at 8.4% today. On a simplistic basis, if we take C+I+G - one can argue there has been some amount of “G” but “I” has been missing. When the investment cycle starts, “I” will kick in and we can easily sustain at 8%.
What we need to go from 7.5-8% growth to 10% is common knowledge. We need more infrastructure. However, it is wrong to say that infrastructure is not happening due to lack of funding. There is no viable infrastructure project in the country that is waiting for finance. There are other issues to be addressed such as land acquisition, mining or the plethora of approvals needed that is slowing things down. These are not difficult issues to resolve and infrastructure will therefore happen. Some of it is already happening. People are focusing on the 10 power projects that do not have coal supply. The fact is that we have installed 26,000 mw of power since public-private partnership was set up. This is more capacity than what we built in several years prior.
Some projects may not take off, others will receive coal from players with surplus and several pending projects will hit the ground. We have been through the worst on infrastructure. We have already come a long way on ports. Airports look better. Power - some issues are still pending. Critical resolution required in roads and mining. I believe these will receive attention very soon.
Let’s take the subsidy issue - the triple “F” subsidy on fertiliser, food and fuel. These are damaging our economy for two reasons - the subsidies are not going to the right people and we need a clearer policy. As far as fertiliser is concerned, a new policy is in place and the burden is declining. On fuel, I am reasonably confident of market-based pricing in the next few months. And on food, whether it is through Nandan Nilekani’s project or through banks’ financial inclusion programme, the subsidy will start going to the right people. If we can get the subsidy right, disparities will start receding.
Now, let us discuss the next issue, the fiscal deficit. Oil prices are rising, fiscal deficit targets will go awry - that is a common concern. That said, the only economist who went right about F2011 GDP forecast was the government of India. Everybody else went wrong. I am not holding brief for the government. I am just saying it the way I see it. I believe that once the debt management office comes into play it will put tremendous discipline on the states’ borrowings and the overall deficit. GST (goods and services tax) will also bring the sizeable black economy into play with buoyancy in revenues. So together, the plan on subsidies and GST will eventually bring the deficit lower. Temporarily, you have an issue. You also have an inflation issue currently. Maybe we could have acted faster, maybe we couldn’t. One must understand this is both a demand and supply problem, some of it is imported. Monetary policy is not the way to resolve because then you could end up hurting growth.
If I had the option, I would look at breaking some of the fiscal targets but bring inflation under control. Inflation will come down partly because the developed world is not in good shape based on my interactions with managements of companies in these economies. Hence there is downside risk to commodities and India’s inflation can come under control. We need tremendous agriculture reform and delta there could be substantial in terms of growth. I have feeling that FDI will be allowed in retail very soon. I think we will see a new India in the next three months, directionally. Issues such as FDI in retail, supply chain reform, microfinance reform, and creation of cooperatives (like in milk) will happen sooner than most think. Again, our problems can be solved. Most people do not realise that we have more arable land than China. Our issue is that we don’t cultivate as efficiently. That is less of a problem than not having arable land.
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