India's unlimited potential: Why the country needs to focus on its ongoing reform agenda, according to HDFC Bank's Keki Mistry

Against the uncertain global backdrop, India has been in the spotlight for being the fastest growing major economy. Foreign investors are acknowledging India’s growth prospects. India as an emerging market clearly stands out.  

In recent years, India’s economic growth has surpassed expectations. For instance, during the peak of Covid-19 in FY21, India’s GDP contracted by 6.6% compared to the estimate of a contraction of 9.5%. At the onset of Covid-19, the Reserve Bank of India (RBI) was proactive with its monetary easing and liquidity support. It needs to be commended for the host of measures it introduced. 

The gradual lifting of restrictions by states saw both demand and consumer confidence come back sharply from September 2020. Strong GDP growth has continued in the current fiscal with Q1 GDP increasing by 7.8% and Q2 GDP by 7.6%. RBI has increased its GDP target for the year from 6.5% to 7%. 

The onset of the Russia-Ukraine war saw spiralling oil prices and inflation started hitting the Indian economy from April 2022. But the RBI reined in inflation through a series of calibrated measures.  

The one key challenge that India faces is its dependence on oil. The trajectory of oil prices always needs to be watched as India is the third largest importer of oil in the world. The oil import bill has a very large influence on India’s current account balance.  

For instance, the Israel-Palestine conflict is the latest  event causing enormous geopolitical concerns. Further escalation could be detrimental to inflation, oil prices, and international trade.  

The finance ministry needs to be commended for not becoming overzealous in its stimulus package during the pandemic. If India had not kept the fiscal in check during the pandemic, inflation levels could have been out of control as we witnessed in several developed economies.

In my opinion, both the government as well as the RBI did a truly outstanding job in managing the economy during the last three years.   

Financial Services Industry

I am extremely positive about the financial services industry in India. Some of the positive signs are as follows: 

 1. Financial penetration in India is extremely low which implies a huge potential for growth. For example, the mortgage to GDP ratio in India is 11% compared to 20-30% in most East Asian economies, 69% in UK and 52% in US. 

 2. Similarly, India’s mutual fund penetration is 16% of GDP compared to 149% in the US and 75% in the UK. This means that with a population of 1.4 billion people, barely over 2% invest in mutual funds and equities. The potential to grow, therefore, is huge. 

3. The introduction of Unified Payments Interface is helping India to transform into a cashless society.  

 4. Lastly, India is expected to be a $1 trillion digital economy in FY27. This will be one-fifth of the total economy at that time. 

Housing and the Real Estate Market

The housing and real estate sector holds the key for unlocking the potential of the Indian economy. Housing is one of the largest employment generators in the economy with linkages to nearly 300 industries. 

The demand for housing remains insatiable in a country like India, which has a huge housing shortage, estimated at over 29 million units. 

There is a tremendous potential for growth in housing loans as the penetration level of mortgages in India is extremely low compared to other countries.  

The demand for housing in India will always be strong due to factors such as government’s thrust on affordable housing, favourable demographics, increasing urbanisation and rising aspirations. 

Two-thirds of India’s population is aged below 35, and unlike the West, in India people do not buy a home when they are in their 20s. The average age of a first-time home buyer in India is generally between 37 and 39, and with two-thirds of the population being below 35 years of age, it means two-thirds of the population has not even contemplated buying a home yet. 

Therefore, there will be a structural long-term demand for housing, and housing loans, in India. 

Climate Change and ESG

Climate change is a global issue which cuts across multiple channels—ranging from physical catastrophes, weather-related disruptions, business model disruptions, technological developments, regulatory risks and changing customer preferences. As a result, the investor community is increasingly demanding higher benchmarks on climate-related disclosures. ESG, hence, is becoming an important criterion for evaluating a company.  

Increasingly, some investors and proxy advisors are actively monitoring responsiveness to ESG factors and comparing a company’s ESG performance to that of its peers.

I do believe that we will see greater shareholder activism on ESG issues in India, with a special focus on how organisations are addressing climate change.  

The macroeconomic fundamentals in India remain very strong. I expect the reform process to continue in the months and years ahead. An extremely strong government focussed on growth, a well-regulated system and enormous growth opportunities in the economy make India the perfect destination for foreign capital. India is a strong domestic consumption-based economy and penetration levels are so low in India that the scope for businesses to continue growing remains immense.

 

The author is Additional and Non-Executive (Non-Independent) Director of HDFC Bank. Views are personal