What is hampering investments in India?

Fri, 27 Sep Pre-Open

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Right from inflation to interest rate hikes, and the over-heated economy to governance issues, this legend knows it all. Mr K V Kamath , the ICICI Bank Chairman talks about the current economic situation. Is the worst behind us? May be… Here are some insights from his recent interview with the financial daily Mint.

Surprisingly, Mr Kamath is not worried about the recent repo rate hike by the Reserve Bank of India (RBI), unlike many. He expects the authorities to figure out the root cause of the problem and administer the right medicine.

Interestingly, interest rates as a medicine did not work all this while. Because it's not the interest rates that are harming the corporate projects in India. Rather it is the clearance issue that is delaying the execution part. Also, the Government is putting its act together to fix up the investment cycle. The government has set the ball on roll with setting up the Cabinet Committee on Investment (CCI). And Kamath is hopeful.

Today combating inflation and maintaining exchange rate stability remain the prime challenges for the authorities. It is a known fact that inflation has been raising its ugly head for the last 36-40 months now. And sluggish economic growth too is worrisome. But the actions on interest rate are of the lesser consequence. The upturn in investment cycle backed by government's measures will kick-start the economic progress.

Let's go back. Last 12 years Indian economy was driven by both investment engine and consumption engine. However, the scenario is different today. Today, the investment engine, particularly, the infrastructure engine is weak. The consumption engine is still running. Hence, the investment-led economy is the need of the hour.

Another concern that has emerged for our economy is the rising bad loans from the banking sector. Well, with the CCI taking effective steps, the fear of further spike in bad loans can be restricted. If not, then there is a problem. Just as mentioned earlier, here too Mr Kamath believes the problem areas need to be identified. Moreover, with the increased bad loans, the lenders are walking a tight-rope on margins. Higher bad loans and the systemic risks have depressed bank profit margins. Bad loans do not generate any income. Moreover, the ticket size of the loans is small. Hence, margin contraction stands imminent. Also, many lenders today are yet to experience the highs and lows in the NPA (Non-performing assets) cycles. Mr Kamath has been a witness to many and expects the pressures to hold on. Well, so what's the solution here? We cannot dismiss the fact that banks are a proxy to the economy. Therefore, lenders need to turn their guards on now. Expansion in book, healthy income and consistent growth will ensure stability in margins.

Articulating well the issues confronting our economy, Kamath believes that today we are at the bottom of the cycle. He can see through the positive side of the economy. The rural story, he believes, is today robust. The services sector is witnessing the highs of 11-12% growth. And the sectors that are hurting are namely the manufacturing and infrastructure sector. And all these engines require growing in tandem.

On the final note, Mr Kamath has suggestions for the government of India. It's imperative now to put the investment engine on roll. So removing roadblocks that are holding up investments in infrastructure sector should be prioritized. Stability is the next solution to the deficit and exchange rate issues today. Getting liquidity equations right and the lending rates right will go a long way in ensuring stability. And then the economic growth… 5% growth is anyway expected. But if we wish to get to 8-9%, addressing all the above concerns stand essential. Therefore, putting all the growth engines to work in tandem will only fuel growth in the system. So while not all the worst is behind, we need to have the right medicines for our problems.