Financing Growth

Very few countries have witnessed as much transformation as India has in the last 20 years. It is a nation on the move and a force to reckon with on the global stage; indeed, a far cry from the “developing economy” of two decades ago. A nation that struggled with a large population, educated unemployed and brain drain, now sees its people as the key engine to growth.

The entrepreneurial ability of the Indian people has been unleashed. The global technology and communication revolution brought our knowledge capital to the fore. Indian industry reinvented itself; it embraced innovation and competition, substantially improved its financial strength and established global benchmarks in cost and quality.

If the first decade of liberalisation was the story of investments and the second characterised primarily by the consumption boom, the coming decade and the next will have both these drivers — consumption and investment — operating in tandem to propel India on a higher growth trajectory.

We will witness a virtuous cycle of growth with two key fundamental factors— our demographic advantage and strong domestic investment activity. India is one of the youngest economies in the world and even 15 years from now, its median age will be only 30. This would mean a larger share of the population will be able to work and generate income — as also manageable wage costs and growing demand for a range of goods and services. Strong industrial output, corporate performance and sustained growth in the services sector are propelling the economy within striking distance of a double-digit GDP growth.

If sustained, this economic activity will throw up immense opportunities for the financial services sector. Rising income levels and rising aspirations of a larger and powerful middle class will continue to provide opportunities in retail credit. This will only help consumer finance grow and those who innovate and excel in execution will win this demand.

The momentum that the businesses have gathered will only increase in the next two decades. Indian companies will now focus on improving the diversity in their earnings profile, and on scaling up operations. They are not only looking at expanding domestically to cater to the large demand opportunity but are now also competitive at a global level.

At a broader level, there will be a greater focus on increasing investment expenditure, especially in areas such as infrastructure. Investment in infrastructure is expected to be about $400 billion (`18,000 billion) in the next three to four years. It is important to note that these investments are being made to meet existing shortages, and will hence be highly viable.

All these factors will provide growth opportunities for banks in terms of project and working capital financing and investment banking, as well as treasury and risk management products.

Poised as we are for such explosive growth, it is important to ensure that this growth is inclusive, that every Indian has the opportunity to engage in meaningful economic activity. We will need to come up with solutions to ensure proper infrastructure, education and health care facilities to our masses.

India faces a paradoxical situation where an opportunity can turn into a challenge if we do not quickly act on it. Our demographic advantage, for instance, can turn into a disadvantage in the absence of health care and skill-building and can cause widening inequality. Similarly, infrastructure investment is an opportunity; but if we do not build the infrastructure quickly and efficiently, the infrastructure deficit will put an increasing strain on economic activity.

To sum it up, the financial services sector is poised for a period of sustained growth. Demand for financial services will be driven by continued urban consumer demand, expansion into underserved markets, corporate investment in India and overseas, and the growing trade and capital flows between India and international markets.