Demand is alive, India Inc to innovate, get lean: Kamath
Jul 05 2012, 12:51 | By CNBC-TV18
Looking at the weak GDP figures, dismal IIP and inflation data, high current account deficit and the falling rupee, a bearish outlook on the Indian economy has gathered more steam over time.
However, KV Kamath, chairman of Infosys thinks different. Kamath opines that the key to growth is the individual who has lost affordability but not demand. In Kamath's opinion, the time is ripe for India Inc to tap its strength to innovate and strategise and cater to the global demand for lower costs.
"I think for recovery, clearly we are talking of 6-12 months. And I'll tell you why. If things were broken, then it will take longer to fix. Things aren't broken here, things need attention. I think that is the key," Kamath says in an exclusive interview to CNBC-TV18's Shereen Bhan.
Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.
Q: Both past and the future, one sees a rather different picture. What makes you continue to be bullish on India?
A: I think exactly as what I have said in that letter. One has to look a little bit at the past and then look at the future. The past in the sense when you question, have you created what it takes to sustain growth? I find people not answering that question. People are getting carried away by the moment.
And then if you look at the future, you look at what drives demand, what drives growth and what drives transformation. If you look at these two, my belief is that the story has clearly not ended, as people would like us to believe.
Q: The story has not ended, but if you look at every economic parameter whether it is IIP, inflation, currency, fiscal deficit, the current account deficit, none of those parameters are giving reason for any kind of hope or optimism at this point in time. When you talk about a turnaround or a medium to long term picture looking different from the one that we are seeing at this point in time, what is that time horizon? When you say longer-term what do you mean?
A: I didn't mean to say that we will only recover in the longer term meaning 3-4 years. I think for recovery, clearly we are talking of 6-12 months. And I'll tell you why. If things were broken, then it will take long to fix. Things aren't broken here, things need attention. I think that is the key.
Let's look at what needs attention and what brings as our Prime Minister said 'animal spirits' back. I think we need to create that environment and you see what is happening in the market. The market is a barometer of mood and animal spirits. Market goes down to 16700 and market today is 17500. What has changed in the space of 4-5 days? It is the ability to create the mood.
Look at the aggregates which really have created this challenge for us. I think the first was issues on the environment. We auto flag issues on the environment but, we should have solutions which we did not have. Then there were issues on land in the same story. We were also hit by commodity cycle with rising prices but, that has corrected now.
Global interest rates are low. Our inflation rate consequent to various things remains high. I guess we need to make sure that we understand what is happening in a global context. There is soft growth, low prices and that translates into our economy. That I believe brings about the correction because that is going to lead to a correction in inflation, a correction in interest rates and to me, this is a key.
Q: As far as issues like land and environment is concerned, we have seen no breakthrough. Environment ministry is completely silent at this point in time as far as land is concerned, the bill is going to be headed to parliament, we don't know what the fate will be because it is currently at the standing committee level. And there have been differences with the standing committee's report that has been presented and of course what the government has presented. But that apart, the only silver lining at this point in time that we seem to be faced with is the softening as far as the commodity cycle is concerned. Even because of the policy uncertainty, with whether we are going to see partial diesel deregulation, whether we are going to see a fixed subsidy cap as far as diesel is concerned, whether we are going to move on kerosene, LPG ever, we are not being able to reap the benefits even as far as the softening of the commodity cycle is concerned?
A: Yes I guess we are not able to reap the benefits of a softening commodity cycle for another reason and that is the exchange rate. I think that's a separate issue that we need to discuss in the context of the challenges that we are facing.
Q: Do you support the government's belief that the Reserve Bank should have acted and cut interest rates in it's last policy?
A: I don't want to second-guess the Reserve Bank. But If you believe that inflation is softening and if global trends are conducive, I think India could effort to be a little bold and press the growth button. Corporate India is not hurting as much as individuals and the retail sector and that's where you need to press the growth button.
A large part of growth which comes from services and services might have slowed down, but none of the growth parameters have fallen off a cliff.
Q: Manufacturing has...
A: Manufacturing is based on demand. Demand may have gone down, but people's aspirations have not died down. Affordability has died down and we have the tools to set that right.
That is why I say that repair is not a 10-year or a 5-year or a 3-year process, it can be done in one-to-two years. India has the manufacturing capacity and can add capacity today in less than 12 months. What has been impacted is affordability which is dependent on the interest rate scenario.
Q: Where do you find yourself in the debate between the finance ministry and the RBI?
A: I think both have a point. But at this stage, we need to change tack and try alternate methods.
Q: You don't believe high interest rates have impacted inflation as effectively as it ought to have?
A: I don't think they have impacted inflation as effectively as they ought to have. The government has tried very hard and the situation was complicated due to relatively high fiscal deficit. But as compared to the fiscal deficit in most of the western countries, India's deficit looks good.
Q: How bold would you like the RBI to be?
A: The interest rate, despite being high, cannot be dismantled in one go. It has to be done gradually. But the focus has to be on to kick-start demand at the individual level which is the source of a large part of growth.
Q: What is your own assessment of the measures undertaken both by the RBI and by the finance ministry to curb the volatility in rupee and your own opinion?
A: There are two aspects to the rupee equation. One, the amount of adverse movement due to cross-currency movements vis-a-vis the dollar and India's economic situation.
Q: Is it the worst-performing currency?
A: The fall from 48 to 52 is because of the general strengthening of the dollar. The fall from 52 to 55.70 is a consequence of India's economic situation.
For the last few years, the capital market has been the key driver of the exchange rate in India. That's surprising, as exports and imports ought to have a significant impact. But in India, when the capital markets nose-dived, it caused the rupee to slide. The focus needs to conclude whether it is sentiment or fact that drives the economy
Q: Do you believe that measures that have been taken so far are enough to restore confidence and to stem fall in the rupee?
A: The measures taken so far were meant to boost the supply of dollars and have had limited impact. What is required are initiatives that will build confidence in the economy which will then send a signal to the market and cause a fall in speculation.
My hunch is that the half of the 52 -56 level is due to speculation. There is no basis for forecasts about the rupee touching 60 or 63. All effort should be taken to put in place the fundamentals that will allow the rupee to find its level in the market.
Q: What is your fair value as far as the currency is concerned?
A: My fair value is that if the dollar has strengthened to level where the rupee ought to have been at 51-52, it's somewhere in that range that we ought to be at this point in time and not at 55-56. To me that is what I call speculator land. The rupee has been pushed, kicked into that spot and needs to come back in. That's where I think bold action is required.
Q: Is the Chief Economic Advisor's paper on managing volatility including banning currency futures too bold?
A: The Chief Economic Advisor should think out aloud as there are several solutions. The way I look at it, building confidence is the need-of-the-hour and prevent speculation from driving the rupee down. The genuine trader in the market has the confidence, but the government has to create conditions that are conducive.
Q: What are you most worried about as far as corporate India's balance sheet is concerned? There is a five-fold hike in CDR just for Q1. ICICI Bank exited Kingfisher Airlines, managed to offload its stake to SREI and a debt fund to cut losses.
A: The situation needs to be view in context. In 2001-2002, between restructured assets and nonperforming assets, around 15-20% of assets were bad. Compared to that China at the same stage of development had banking assets of which 50% or more were bad. Today, India has less than 5% of bad assets between restructured and bad assets.
Q: So you are not particularly worried?
A: Step back for a minute. There will be trouble when there are no assets and a process of restructuring is attempted. There will be a trouble in those cases and the system needs to be prepared for that. But wherever there is a loan backed by an asset in an economy which is expected to grow, the asset becomes productive.
Q: But there's trouble across the economy that needs to be addressed....
A: The problems need to be examined .
Q: Do you believe that the problems can damage the economy?
A: I don't believe it at all. As a country which has grown at a sustained pace for a very long period of time, there will moments when there will be a build-up in NPAs and I think growth will forgive this.
Q: What is your opinion about the global crisis because that will impact technology companies like Infosys? According to reports, including a recent paper by Macquarie, credit rating agencies have downgraded almost every Indian IT company on the basis of a murky or cloudy global outlook.
A: I will explain my perception of the IT industry. The global IT industry is slow and Gartner, in a report, has explained that its own estimates of growth for the year have been brought down quite sharply.
So it is expected that the global IT sector is faced with a slump. Indian IT has to figure out a competitive edge and deliver value to all customers.
Q: You don't expect a six-month turnaround as far as the Indian IT sector is concerned?
A: The global IT sector is weak. The turnaround time for the global IT sector could be slightly longer. And the Indian IT sector is offered the challenge is to operate within a new context and environment. This calls for new, different strategies and getting the right person for the job.
Q: Are you expecting the bench to go up significantly?
A: I will put it this way. Companies will have to learn to deal with the bench and there are a lot of very interesting challenges in bench management. I believe that the whole IT sector will go through another metamorphosis and take advantage of the situation.
Q: Given the global crisis, will there be continued pressure on the margins and pricing over the next couple of quarters which will result that the bench is probably going to be higher?
A: I won't speak for Infosys. But if I were to speak as an observer of the IT sector, all those fears that you have mentioned have to happen. There is enormous pressure around the world to cut IT costs
This demand needs to be catered to by adjustment of strategies by Indian IT. India offers huge opportunities for innovative use of technology in government. Three years ago I wouldn't have believed it, but today it will virtually happen.
Q: But it can't really make up for the kind of demand?
A: I think it will make up for a lot demand, not only from India, but from the emerging markets around the world. I don't think that the demand from the West is going to drop. The key for Indian IT companies is to remain competitive. I think the bottomline is skills, upgradation of skills and staying lean. These three will define who succeeds.
Q: Acquisition is key to competitiveness. Reports indicate that you have suggested to the Infosys management of looking at acquisitions. Is there truth to that? Would it be a prudent move?
A: My suggestion to the Infosys management is false. The Infosys management has, on its own initiative, articulated this decision. But acquisitions are never easy.
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