How is India insulated against global challenges? KV Kamath has the answer

KV Kamath, Chairperson, National Bank for Financing Infrastructure & Development (NaBFID), says the manufacturing sector is doing good with clean balance sheets and regular cash flows. Any growth requirements – bet it greenfield or brownfield – can be met with hardly any debt, or marginal debt in a greenfield, he assures.


How is India insulated against the global challenges and what are its advantages in the growth story?
We have a runway of 25 years. We are going to exercise it and will be a $25-trillion economy in those 25 years. I want to take that upward. Now, let us look at the challenges; a significant global challenge is looming and let’s see how we are insulated. The way we have come out of Covid and the way our entire corporate ethos looks now, we have deleveraged corporate India and balance sheets.

We have clean balance sheets in the banking business and strong cash flows in corporate India, the likes of which I have never seen. These are the key parameters to understand whether a country will grow or not. Then, you come to the second layer. Do you have an investment opportunity? Because you may have met all these requirements but without any investment opportunity things are not going to work. As I said before, our runway is 25 years, but why?

We have a lot to do in getting our water management right as that will boost agriculture and animal husbandry. A lot of work needs to be done in the infrastructure sector, too. With respect to the infrastructure, particularly roads and railways, the government is doing the needful. For the rest, the private sector is working hard. It is also running hard with the ball in sectors like telecom, ports etc.

The manufacturing sector is doing good with clean balance sheets and regular cash flows that I have not seen in my 50-year banking career. I think we can meet any growth requirements – bet it greenfield or brownfield — with hardly any debt, or maybe marginal debt in a greenfield. The services sector is performing wonderfully well, and I believe it will continue to do so.

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The icing on the cake is the digital economy. When we reviewed the job scenario 20 years back, when white-collar employment happened through the IT business, we found every five to six jobs generated were in the IT sector. The same thing is happening now. So, if you have one-and-a-half million people in the retail part of the business and they are creating six other linked jobs, you are talking about roughly 9 to 10 million jobs that are already happening there. The figures do not include the new jobs, which will be created because the sector is growing at a pace.
So, given all these conditions, there is an urgent investment need and there is its possibility because of the clean balance sheets. More importantly, I think, we have given policymakers a conducive environment in terms of interest rates where everybody can thrive — whether it is the manufacturer or the consumer who is going to borrow. Interest rates have been kept at a level where you can grow and by doing this a new model has been shown that it is not necessary to follow a 100-year-old theory of inflation and interest rates, the way Europe and the US have done.

But, in our case, we have managed it excellently well with interest rates slightly below inflation and targeted inflation set to come down. So, you have created an environment for growth. Global challenges notwithstanding, we are in a good place. Yes, there will be some turbulence as things unravel in the West, but I do not think this is going to impact us even in the intermediate period.

Some would argue that the bedrock of any economy’s interest rates is a function of global moving parts. If the US Fed increases interest rates, it may get a bit challenging for the Reserve Bank of India as it will have to protect the currency. If interest rates go higher, at some point in time, will the retail borrowing ability or affordability face headwinds?
It is a very interesting point. We need to take a holistic view of what is happening. The US is taking certain corrective steps, but look at what is happening in the UK, Europe or Japan. Over the last one year, the yen has gone down almost 35 to 40% and, you know what has happened in Europe and the UK. In real terms, Europe is near about 8- 10% negative interest rates. So, given all these things how do you manage your currency? I think, the rupee has strengthened against three currencies I mentioned — be it the pound, the euro or the yen. The currency has, of course, weakened against the dollar but not as much as other currencies. So, it is an interesting time of flux.

In this, we hear the phrase, the de-dollarisation of the economy, increasingly talked about. I am sure we will look at how is it that we could de-dollarise. Could we do some netting out, could we do some trade in local currency? But it’s interesting to note that things which I have not seen in 50 years, are going to happen. So, a strong currency of a particular country may not be much of a challenge as it could have been because there are other offsetting items here, which could play very well into our hands. What I would only look at is the measures to take for a conducive growth path.

Yes, we have low interest rates, strong balance sheets, lendable capacity with banks. Do we have a runway where there is a need for investment? Clearly yes. So given this and of course there is a new driver in digital India, which is going to be around 5% of the economy today and, in the next five to six years, will constitute 25 to 30% of the economy. So, at this point in time, I am more bullish than I have ever been in my 50- year career in the banking business.

Whether it is a geopolitical tussle or the ugly reality of world, we are going through an energy crisis like never before and India is still dependent on other countries for their energy imports. Could this really be the chink in the armour? Will meeting the demand for energy-hungry India be a challenge?
I think yes. If again, in Western countries when crude oil demand peaks, you will see oil going through 90 and 100. We will have to be careful, but we are looking at a three- to four -year window before we start building massive alternate energy resources to meet our requirements. I believe that itself will be a momentum provider. I will look at this challenge as a positive because that will be augment our Aatmanirbhar capabilities, to make what we want in terms of energy.

Also, that investment will drive growth for the economy. I am not as pessimistic as I could have been if this correction had not taken place and corporate India had not responded and the government support in terms of strategy was not there. All these are there, so, for a short period, you will have to be careful. Just now things have started looking good — oil is down, global demand probably will come down so that gives us a window.

We have historically looked at China as the benchmark. The way China has really evolved as an economy, do you think it is high time we start thinking independently and put that good old China comparison on a back burner?
I think the time has certainly come as I can see in almost all areas, particularly on the digital front, we have caught up and are probably rising ahead. We were probably behind in getting and pushing manufacturing. I think, we clearly are now running because they have a huge domestic demand and with China plus one, Europe plus one, we have a global demand too. Covid, I believe, has allowed us to extract 20-25% productivity gain if you look at actual figures of corporate India. Otherwise, I am not able to figure out how your profitability can grow. Of course, what we are paying to the government is also growing at these numbers. So, clearly, corporate India is a competitive engine today. They have a competitive machinery.

Do you think it is high time that the rating agencies take note of what is happening in the world and change their ratings for European countries and increase ratings for India?
We have to make this as our mission in terms of how to get the rating agencies look at India and the West in an appropriate manner. I can say that according to my experience with the global rating agencies from the perspective of BRICS Bank, there is a whole lot of history in the way they have gone about their ratings and their yardsticks are clearly flowing from the West. I think we need to present our case in a much more forceful manner, which I am sure is being done now. To make our point that those yardsticks are not applicable, draw all sorts of outcomes that we have seen in the West. I have not seen any rating downgrades, given the sort of numbers. Imagine if we are as profligate as the West, what would have happened to our rating today? So, the case now could be made much stronger than in the past. There is a case to relook at Western ratings and to clearly rerate India upwards.

Do rating agencies really matter? Considering the experience of where India rating is and the kind of flows we have got, at least in the bond market, rating agencies are a crucial benchmark but frankly their edge now seems to be reducing.
Yes, actually if you go along we need to also ask a question in the Indian context: How relevant are the rating agencies, if we get our interest rate equation right, if we can make sure that the currency is stable, I think, honestly, the rating agencies do not come in as a critical force for us unless we want to borrow a huge amount and the rating number there could determine the cost at which you will borrow. But, we need to get the rating right because, all said and done, still it is a number that people look at for a variety of reasons. So I am sure we will communicate in an appropriate manner the strengths as a country and look at each metric in which you are rated and make sure that we address those areas.