Rising regional inequality was highlighted, though no one felt the Naxalite issue was serious enough to derail growth.
I had the privilege of attending a full-blown three-day India conference last week in Mumbai, hosted by JP Morgan. It was the first conference of this type that I had attended in years and was well worth the effort. JPM did a great job of not only bringing together the usual large cap. Indian companies but had numerous lateral sessions with top-quality guest speakers. They had invited the CEOs of GE, Federal Express, AIG, Shell, Cargill and others to speak on the experiences of MNCs in India. They also had speakers like Bibek Debroy, Omkar Goswami, Vinayak Chatterjee and Arvind Singhal to speak on the macro. All in all it was an excellent conference and hopefully something that JPM will make an annual event.
In terms of takeaways, there were many, but let me just highlight a few:
There was a clear theme of investments, which was all-pervasive. We heard about how five players in retail alone had lined up investments of $24 billion over the coming five years across stores, real estate and their supply chains. Vinayak Chatterjee made a strong case of how investments in infrastructure had to accelerate to $320 billion over the next five years and every large company in presentation after presentation highlighted big capex plans.
What also came through quite clearly was the acceleration in job creation of the non-IT variety. Sunil Mehta of AIG spoke at length about how creating your own distribution was critical to success in financial services and the scope for job creation across India this presented. On the retail front also, the roll-out of all the new entrants would create jobs for at least 2 million people across India. More importantly, these jobs would not be restricted to the English-speaking, urban-educated youth but have a much broader impact and dispersion. Every company across sectors also highlighted plans to hire and train their workforce.
Another theme which came through clearly was an extreme shortage of skilled workers. Skills shortages were pervasive across sectors and salaries and attrition levels were rocketing. Though a big issue today, most of the CEOs I spoke to seemed to feel that this was a temporary phase that would last for 2-3 years, after which things would settle down. They also highlighted the efforts being made by industry to improve training infrastructure and the accelerating trend of returning Indians. No one felt that this could torpedo its growth plans.
All the MNCs that spoke were clear that India was a long-term bet, and one where short-term easy profits were difficult to come by. Competition was intense across most sectors and the locals did not really care however great and global a company you were, if you could not show them immediate value. Most were actually complimentary towards the government, pointing out that if you chose to, you could operate in a transparent and ethical manner without any short cuts. Most were also conscious of being seen as good corporate citizens, and pointed out that it did not pay to be seen as aggressive by the regulatory regime.
Globalisation and growth were a common theme across all sectors and presentations, and the drive and ambition of corporate India were breathtaking.
A very interesting point made by Arvind Singhal in his presentation on retail was his belief that prices of the typical basket of goods consumed by a middleclass household would drop by 10 per cent, through the entry of organised retail and private label. If true, this will have a huge multiplier impact on consumption of other non-essential goods and drive strong growth in other product categories. Its impact on branded FMCG players also bears watching.
Many participants felt that the time had come to look at rural and semi-urban markets; a large number of companies felt that their next leg of growth will come from these areas and that growth was now accelerating in the hinterland.
Rising regional inequality was highlighted as a worsening and potentially destabilising issue, though no one felt the Naxalite issue was serious enough to derail growth.
An interesting debate, which I think has serious investment implications, is the question what India’s trend growth rate is. We had Bibek Debroy make a very strong argument that India was now on an 8.5-9 per cent growth trajectory, which will accelerate further to over 10 per cent in the coming years. Even Omkar Goswami talked of 7 per cent as being the worse case outcome, which could accelerate to over 8 per cent if certain steps were taken. I could sense the disbelief in the audience, and a feeling that the locals were getting carried away.
This is, I think, a critical issue which every investor needs to have an opinion or view on. Are you in the growth optimist camp, which believes that India has broken out and established a new growth trajectory of 8 or 9 per cent per annum and can sustain this growth for years to come? Or do you believe that we are still on a 6.5 per cent growth trajectory and the current 8 per cent plus growth is just the peaking of the business cycle? Your stand on this issue, to a large extent, will determine your view on the markets.
The growth profile of corporate profits will be dramatically faster in an environment of 8-9 per cent GDP growth, as opposed to 6.5 per cent, as a delta of 2-3 percentage points in GDP growth has a disproportionate impact on profitability. If you truly believe in our country being able to achieve these higher growth rates, then everyone will be wrong on corporate earnings growth. All the analysts and investors will be forced to upgrade their numbers and the markets will not seem so expensive on these new higher profit projections. If you, however, are in the stable 6.5 per cent growth camp, then the markets seem way too expensive and earnings will probably disappoint somewhere down the road.
I have not seen much analysis done on this issue from market participants, but I think we all will need to take a position on this at some stage, for it is critical to determining your long-term view of the markets.
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