The Indian Economy Blog

February 9, 2008

Capital Investment: The Next Wave of Growth

Chandra Kochar, joint managing director and chief financial officer of India’s largest privately owned bank, $80 billion ICICI Bank, is bullish on India growth story. She contends that the growth in India is shifting from consumerism to manufacturing and infrastructure.

In the last five to seven years, India has grown on the basis of its knowledge economy and consumerism. The IT industry, and its related industries, provided jobs for Indians. As Indians earned more, they spent more, and that’s how consumerism drove economic growth as a whole and also led to a huge growth in the retail-credit and consumer-credit business in India. As we peak today, this growth in consumerism is leading to a huge investment cycle in India. Because manufacturing capacities have been fully utilized, and infrastructure needs to be established, people are now investing in manufacturing capacities and infrastructure. I estimate the Indian corporate sector has plans today to invest about $700 billion in manufacturing and infrastructure, which will be spent over the next three years. The next wave of growth for India is going to come out of capital investment.[IK@W]

The Indian government has already accepted a little dent in its prospective growth rate this year. It is widely believed that India’s internally driven growth, has increasingly decoupled its fortunes from the US economy. It is certain that an US slump will impact India to a lesser extent now, than it might have done a few years ago. Indian companies are more resilient than ever to a global downturn these days, with lower borrowing costs and healthier debt-equity ratios. Nevertheless, there are some challenges.

Inflationary pressures loom on the horizon. Inflation triggered by higher food and oil prices could deflate the rapid economic growth curve in India. The tight monetary policy of the RBI is related to inflationary pressures. With large-scale credit contraction in the Western markets, the growth plans and capacity expansion at Indian companies will find it difficult to access overseas credit .

The uneven growth in the middle to short term, with the states of Madhya Pradesh, Orissa, Uttar Pradesh and Bihar having seen lesser growth than others, has led to increased social and political tensions. The increased spending on social sectors and populist largesses in the election year, including recommendations of a new pay commission, can also impinge on the growth story. This spending, however, can be met by the dramatic increase in direct tax collections (by over 40% in each of the last two years).

As a banker, Kochar can probably view certain propitious omens that most other economic commentators in this country cannot. The jury is, however, still out on her hypothesis and previsions of a sustained growth rate for the Indian economy.


  1. Can we sum up the essence of what you said as ‘Investment cycle follows the Consumption cycle’? In that case, given our large domestic market, we should expect another Consumption cycle in a few years…

    Comment by photonman — February 9, 2008 @ 11:07 pm

  2. Good overview.

    Any predictions?

    Comment by HmmBut — February 10, 2008 @ 4:59 am

  3. I doubt india can achieve capital investment at low cost because
    of high commodity prices. We have to see what’s its effect on inflation. I think IT led consumption will pause this and next year due to US recession. India’s entry into wheat,coal market has tripled wheat, coal prices with india just importing 3 million tons of whaet and 1o millions tons of coal.
    Higher interest rates at 14%( PLR) is not good for capital investment cycle. Capital investment is going to come at very high cost. Will returns be greater than cost? Time will tell.

    Comment by satish — February 10, 2008 @ 3:34 pm

  4. The stock markets seem to disagree on the decoupling of the US growth with that of the Asian giants. The recent crashes were largely sentiment-based, but if a downtrend is established we can be sure that the economy will follow that downtrend, as will the price of commodities.

    Comment by Kiran — February 10, 2008 @ 5:45 pm

  5. The good news is that the economy won’t overheat.

    Commodity prices can continues to go up regardless of a recession or stalling of growth in the US and even in EU. Unlike India, China has massive savings and has not invested enough in its infrastructure in proportion to its massive savings. In order to shore up their economy in case of a slow down in exports, it can easily start massive public works projects.

    I don’t think stock markets have any strong relation to local economies because of foreign capital and listed businesses.

    Comment by HmmBut — February 11, 2008 @ 8:06 am

  6. I was taking a look at the global Fortune 500 list at

    I was shocked to see that 24 Chinese companies are on the list as compared to just 6 for India. Even a tiny country like Switzerland, with a population half of Delhi’s, has more than double the number of Fortune Global 500 companies. India has a long long way to go before the capitalization of Indian companies can match our neighbors’. What is interesting is that Indian people outside of India seem to be far more bullish on the prospects of Indian companies than Indian workers in those companies. Maybe this is a side-effect of a sense of alienation in a foreign land, and nostalgia which lends those to vociferously deny that in actuality capital formation in India severely lags behind global standards.

    Finally the govt has decided to scrap the “reserved” list of manufacturing products, and is moving towards full convertibility, which should allow Indian companies to raise capital abroad at lower rates where they do not have to go to Indian banks and their govt set usurious lending rates. Though it is interesting to note that companies may soon have to deal with another kind of “reservation” soon. As they say, what the Govt giveth with one hand, the other taketh away. This may finally allow Indian companies to grow in scale and heft and spawn satellite industries in India which will provide high paying jobs and upward mobility to Indians. The communist left is already making noises about the de-reservation and their impact on SSI units, who have been known to churn out sub-standard goods that unfortunate Indian consumers put up with. Indian consumers are a really pitiable lot, where their govt actively conspires to deny them quality goods. Assuming the govt is able to side-step these communist parties, who are doing their best to keep India poor with the aim of equalizing with sub-Saharan Africa, a GDP growth rate of > 7% for the next 25 years should finally allow Indians to achieve the same per-capita GDP as Mexico. Thank god for small miracles.

    Comment by Observer — February 11, 2008 @ 3:33 pm

  7. [...] Cross-posted at the Indian Economy Blog [...]

    Pingback by Pragmatic Euphony » Blog Archive » Capital investment: The next wave of growth — February 12, 2008 @ 12:58 pm

  8. @Observer
    We might not have a lot in top 500, but we definitely have a lot in top 2000.

    In Forbes Global 2000 company list we have 34 companies compared with 44 of China, which is quite comparable given the size of economies.

    A lot of Indian companies, like those in Tata Group and Reliance Group are very fast growing and in 600-1500 range and in a couple of years there might be more additions to the Fortune 500 list. Next year, Tata Motors (with Jaguar&Rover) and Tata Steel (with Corus), along with probably ICICI, Bharti and Reliance Comm could join big 500. And India’s top 3 software manufacturers also are expected to join the 500 list in 2-3 years. And if we manage to start our banking consolidation and make 3-4 giants apart from SBI, they would also get to the top. So, hopefully we will have in the range of 20-25 companies by 2010.

    Of Chinese top companies, most of them are banks that are historically sick with Non Performing Assets. If their stock markets and real estate markets cool down, then these could be in big trouble. I’m not saying that India is ahead of China. I’m just saying that this statistics doesnt convey the full ground picture, and the gap between India and China may not be that big as this suggests.

    Comment by Balaji Viswanathan — February 14, 2008 @ 5:28 am

  9. Reg populism. Since we don’t have welfare, or good education or healthcare support – isn’t this “populist” spending the only social spending we have? Developed economies including those who uphold free market values spend more on their citizens.

    Comment by SJ — February 15, 2008 @ 8:32 pm

  10. Right said SJ.

    India is actually Social Darwinism at its worst and many people here want it to get worse.

    Comment by HmmBut — February 19, 2008 @ 5:33 am

  11. One of the major challenge is the adverse effects of rupee appreciation. A sharp appreciation of rupee over the past year has begun to erode the competitiveness of our Indian exporting business. This is a blow to the Indian industry that had just stepping to recover from a deep recession and project its profile in the international markets.

    Comment by Kerala Banking — February 20, 2008 @ 10:16 am

  12. Post LPG reforms focused attention on deregulating the country and inducing foreign investments i.e.FIIs & FDIs Eventually, it paved way for India occupying a position among the top countries in the fast growing Asia Pacific region. India has the largest democracy in the world and has experienced stability, since its independence. India’s political institutions have encouraged the growth of an open society, where people can express themselves freely. It is truly an example of a free economy. So go ahead and hug the upcoming sound and healty economy,also do not flee abroad and stay to enjoy sound financial life even in India from very few years of now

    Comment by SYED MOHD FAISAL — February 29, 2008 @ 9:19 am

  13. Go ahead and hug the upcoming sound and healty economy,also do not flee abroad and stay to enjoy sound financial life even in India from very few years of now as day by day new industries have been setting up and new mergers & acquisitions are in the process.Due to slump in U S economy seems nothing to impact on going ahead economy of India as emerging investment flow as well as capital flow are lying on floor of the country, though we have been sharply cutting poverty by 10 % anually so few more years required to reach the height of Indian economy

    Comment by syed mohd faisal — February 29, 2008 @ 9:25 am

  14. ICICI Bank’s estimates of investment in manufacturing and infrastructure at $700 b for the next three years is encouraging. But as the incremental capital-output ratio increases, will the increased investment translate into higher growth? See Economic Survey 2007-08, which shows that manufacturing ICOR is almost at 9. It even suggests that excess capacity might be building up. This is a danger sign similar to 1997, when the factors of overinvestment, global crisis, pay commission and high interest rates along with poor monsoons combined for a long slowdown. The similarities of 2008 with 1997 are uncanny. Hopefully slowdown will not be repeated in 2008 due to high investment rates.

    Comment by Sharmila — March 4, 2008 @ 10:09 am

  15. India needs:
    1. Network of roads
    2. 24X7 electricity
    3. Housing for 1 billion plus

    India gets:
    1. Tata tea buys Tetley
    2. Mittal Steel buys Arcelor
    3. Tata Motors buys Jaguar


    Unless our think-tanks can create the financial structures which enable India to get what it needs – and not what Europe/UK/USA needs – we will not get there. China’s infrstructure financing model is what we shud be analysing for clues, and Korea’s and Japan’s….please

    Comment by sinhapore.j. — March 8, 2008 @ 3:38 pm

  16. A quick analysis of this colorful rosy prognosis:

    1) Inflation: True inflation based on typical household basket of consumables/expenses over the last 5 yrs is not as rosy as our fin-min/manmohan claims it to be. Would any one agree with only 6% apprecitation in a)rental cost b)transportation cost 3)commodity cost? As per one calc, India’s actual inflation is north of 13%. We claim that china’s GDP is cooked…what do you say about india’s inflation figure..spiced up with obsolete basket-constituents and thier weights.

    2) GDP: Our GDP is driven more by domestic demand/consumption rather than exports. Also, investments required to improve/sustain GDP is supported by strong savings growth. But, the sustainability of this GDP is questionable, given the lack of infrastructure needed for this rate of investments. Theoretical GDP growth you can expect from this level of investments ought to be discounted with india-specific factors to come up with a realistic Trend rate for future. China is more reliant upon exports as bulk of it’s GDP drives from this component and therefore coupled to global consumer spending. Govt also should be publishing or atelast keeping track of the contribution-pattern of various GDP components like agri, consumption, govt. spending, exports to bring these in-line with what we need them to be in future through effective policy, fiscal and/or monetary.

    3) Credit: Easy access to cost-effective credit is vital to any industry to survive and compete on a global scale. RBI’s monetary policy to control inflation would bring in increased rates which would put industry at a disadvantage whose cost-of-debt is more than any other emerging economy. It ought to be allowed to tap into global credit-mkts for cheaper funds to have a level-playing field with global peers. Domestic bond industry also has to be encouraged/improved through fiscal/monetary policy-measures to get /build self-reliant and deeper credit mkts with in india to prevent getting burned in global credit-squeezes like current crisis.

    4) Rupee: Over-valued indian rupee has to be controlled through RBI sterilization measures on a continous basis to protect the domestic export-relying sectors like textiles and miliions of jobs linked with those sectors. If china is strongly pegging thier currency to USD and india lets the mkt decide the cross-rates, it would put the entire sectors like textiles in jeopardy and risk being priced-out of global consumer mkts. Passing on the cost is only a luxury with IT sector, but all other sectors depend upon global competetive pricing.

    5) Social: Home-ownership is something that a typical middle-class family used to dream and achieve over thier life-time in almost all the job-centers in india, a decade ago. It’s next to IMPOSSIBLE for typical middle-classer entering the job-mkt after education, to even dream about that now. [pls. ignore niche demographics like IT, mgmt jobs and focus on broader job-mkt]. Any country in the world can not claim developed status, until it provide it’s citizens with affordable means of home-ownership. This unfortunate metamorphosis of housing mkt is direct result of twisted-economic-policies with total blindness about these social factors and chasing growth at the expense of permanent loss of fundamental necessities of household.

    6) Jobs: Shrinking contribution of agriculture to GDP is in contrast to millions of unskilled labor that still were stuck with that sector. Even as we successfully are shifting some percent of them to mfg jobs, it has to be accelerated by bringing/encouraging sectors that can assimilate this vast demographic of currently unprodutive unskilled workforce there by brnging them out of poverty lines and helping their families to build a better future.

    Comment by Siva Moturi — April 2, 2008 @ 11:19 am

  17. What do bankers know about buiness? I think we are finding out, not alot. The probabilities fo India’s next cycle being one of capital spending is low. The next cycle of India’s growth will be the painful absorption of the malinvestments made in this cycle. And, likely finding a way to replace the outsourcing botom’s economic input. As, it is ending.

    Comment by NotEvenClose — April 3, 2008 @ 5:13 pm

  18. My feeling is that we Indians are far more pessimistic about our growth prospects than is warranted. This may be due to years of stuttering on the economy front with stop and go policies. But this may be about to change. As recent GDP growth numbers indicate, political decisions have less and less to do with economic matters. One way of looking at this is that even withn politicians being the way they are, we are still growing at 9% p.a. What happens if a new government gets its act together and unleashes a new wave of reform?

    Comment by Mahendra Naik — June 1, 2008 @ 4:56 pm

  19. It is now very good timing to review this article and I believe more significance could be brought about by reading it again some months later. I dont know alot about Indian economy, but i think people were not that worried about the future perspective when this article was published and posted here. Now, inflation made new record and interest rates was just increased, the future may not be gonna look that bright, but not gloomy yet.
    Personally speaking, when difficult time is gonna come or has already came India does have some advantages and some disadvantages. the indian economy is widely believed to be domestically based, but the fact doesn’t assure india can be free from global inflation; the indian economy hardly relies upon export, but the trade deficit along with inflation threatens to scare foreign investment to escape. Still, now i dont think india will follow Vietnam’s track, but slow down is inevitable and whether india could repick up its momentum depends heavily opon the world economy’s performance.
    Anyway, india’s fate is up to the endurance of its people and the wisdom of its leaders.

    Comment by Vito Shao — June 26, 2008 @ 3:01 pm

  20. Whatever i said in february has come true. Inflation is 11% without passing the full cost of oil. Steel prices are going to go high following
    rio tinto getting 96% price increase for iron ore. But i do believe all base metals are overvalued if china grows below 8%. we could see correction there. But oil is in real scarcity. we should expect higher oil prices. no speculation there.
    People cannot come to terms that oil is driven by demand supply imbalance
    because the life they dream will become a myth if oil price go up. they will look foolhardy. So people will never accept oil is driven by supply-demand imbalance.Coming recession will be a mythbuster for current euphoria. Most people’s conviction will be a falsification.

    Comment by satish — June 26, 2008 @ 5:42 pm

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