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Om Prakash Bhatt,
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Ending the era of licensing raj
Florence Chong, Editor, ATI Magazine
09-06-2010
April/May 2010 ATI Magazine
SYDNEY — The lumbering Indian Elephant is developing something of a canter as expected growth moves to at least eight per cent this year, on top of 7.2 per cent for the year to March 31, according to leading Indian banker, Om Prakash Bhatt.
Bhatt, known popularly by his initials as OP, is Chairman of the subcontinent’s largest bank, the State Bank of India (SBI) Group, which owns six other banks, insurance and other financial services businesses, and boasts collective assets of $US300 billion.
As OP sees it, India has started to reap the benefits of deregulation, unshackling the entrepreneurial spirit of its citizens. Indeed, says Bhatt, India did not skirt around the global recession by chance, nor is its
economic growth likely to slip into recession. Its core strength is the domestic economy.
India’s economic growth is broadly based – across all geographic boundaries — and benefits from all strata of its diverse population, Bhatt says. If the Government continues to press ahead and develop much-needed infrastructure — the catalyst of recent economic achievements — double-digit growth is not beyond India’s grasp. “We have a billion people thirsty for growth and better living standards,” he says.
Bhatt believes the basic difference between China and India is the quality of growth. In India, growth is widespread. India was able to chalk up an extra 7.2 per cent in GDP for the year ended March 31 because private consumption did not falter. And India did not need to implement a RMB4-trillion (US$585 billion) stimulus package, as China did, to shore up growth.
Rather, India’s growth came from an old-fashioned, socialistic approach of wealth distribution. Bhatt says that, three years ago, the Government instituted a wealth distribution scheme guaranteeing all Indians in rural areas at least 100 days of work each year. As a result, he says, the rural areas grew faster than urban areas in the past 12 months.
And with extra income supporting consumption, India’s retail sector and its services industries — health, education and so on — were not affected by the global slowdown.
“Growth took place in rural and urban areas,” Bhatt told ATI. “Our Government is constantly targetting the urban poor, so that they can be brought into the mainstream economy.”
Bhatt says India’s democratic political system allows Indians to make their desires visible through demonstrations and protests. “Politicians have to be re-elected, so they have to listen to their electorates,” he says.
India has continued to be run under a democratic political system — with a strong socialist bent – since independence in 1947. It is a political system that has been both a blessing and a curse.
It has been a blessing because the system is the reason that growth appears to be more balanced across the population, although India continues to be home to a huge number of people living in poverty.
But the socialist approach has been a curse because, for many years, it condemned India to what came to be known as the “Hindu growth rate” of around 3-3.5 per cent. Indeed, for a great many years, says Bhatt, growth was around 1.0 per cent; when it hit 3.5 per cent, it was a major news event.
“Successive governments wanted growth to be inclusive, and to focus on the poor. They dominated key sectors like the coal and steel industries. As there were not enough resources to go around, the State sort of commandeered them. It limited resources to the private sector through a permit licensing system. The focus was on import substitution and exports were shackled. We were shuttered from the rest of the world.”
But since the Government of Narasimha Rao (1991) — in which current Prime Minister Manmohan Singh was Finance Minister (and the architect of economic deregulation) — India has gradually moved in tune with the rest of the world, says Bhatt.
For example, the import licensing system is being dismantled, doing away with a privileged group known as the “permit licensing raj”, blamed as a source of corruption and red-tape that has hindered India’s economic progress. Bhatt says that only a few sectors are still subject to licensing. And the licensing raj era is all but gone. With it, corruption has reduced, although it is still present.
The Government is actively collaborating with industry groups, such as the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Confederation of Indian Industry (CII), to see what else needs to be done to facilitate private sector development. The Government now sees its role as that of an enabler, to create the environment for business development, says Bhatt. Education and health will remain under Government control, as will programmes like the transfer of money to rural areas.
Withdrawal of government from many sectors of the economy has unleashed the entrepreneurial spirit of Indians, says Bhatt, paving the way for private sector businesses to flourish. He says the programme of State
divestment continues, with the Government now wholly owning only 10 per cent of the enterprises that it once owned. But even where it has divested, it continues to hold at least 51 per cent of the entity.
Bhatt’s own group, SBI, is 59.4 per cent-owned by the Government. He does not think this is a bad idea, because the Government earns dividends from its investments, sharing in SBI’s US$2 billion profit last year. Proceeds from its investment flow back to Government coffers to fund other programmes, like rural employment guarantees.
Bhatt says that as the large groups, like Tata, Reliance, Larson Toubro and Hindustan, grow, they spawn growth of small to medium enterprises, who feed off these giants as suppliers.
“You will find that Indian companies and entrepreneurs have achieved so much confidence and scale in India that they are now actually looking outside India,” he told ATI.
Bhatt says momentum has picked up as Indian groups perceive opportunities in overseas market for mergers and acquisitions – in the fallout from the global crisis. The most recent high-profile deal is the acquisition of the Jaguar and Land Rover car marques (from troubled US carmaker Ford) by the Tata group, for US$2.5 billion.
India is not just engaging with the global economy — it will globalise at a faster pace than any other country in the world, says Bhatt. The reasons are technology and movement of people. In both instances, India is well-positioned. Bhatt points out that every single one of the Fortune 500 listed companies has a link to India through joint ventures and outsourcing of back office operations — marketing, research, accounting or other activities — to India.
India’s best-known export to the world is IT services. “Partly, because it is cheaper to outsource some back office functions to India, and partly because the talent for this type of work is available in India,” says Bhatt. “Foreign companies look to India for cost efficiency and intellectual content. For example, IBM has 80,000 employees in India.”
Just as Indian companies are chasing offshore opportunities, India itself is offering foreign investors equally tantalising opportunities. Infrastructure funding is a popular area. Many foreign banks have established specialist infrastructure funds for projects in India. SBI and Australia’s Macquarie Group have a US$2.5 billion infrastructure fund. Bhatt says the fund raised US$900 million at its first financial close.
Bhatt, whose banks are financing partners for Indian corporates in their overseas acquisitions, says Indian companies go offshore for the same reason as other Asian firms. They are looking for brand, distribution and marketing channels — and for raw materials.
Look no further than SBI’s own operations. “Since I took over as Chairman in 2006, revenue from our overseas operations has grown from seven to 14 per cent. Our bank has always been the most international of Indian banks, with the widest spread of branches (in 33 countries today), but, until 2006, international operations were a small part of our business,” he says.
“I want our offshore businesses to contribute 25 per cent of group income. I’ve focussed on Corporate India’s urge to go offshore. The best of India’s multinational firms bank with us. We work in sync with our clients in their push to go offshore – it is mutually beneficial.” (Bhatt was in Sydney to attend a board meeting of Insurance Australia Group (IAG). SBI has joint ventures with two Australian companies — IAG and the Macquarie Group.)
As yet, SBI is not a match for large Chinese banks, but it does rank among the world’s top 50 banks. Just as the Indian economy is growing rapidly, Bhatt says SBI’s business can grow at a double digit rate if the Government pursues further reforms in the financial services sector.
State Bank of India is one of the Big Four banks of India. The other three are ICICI Bank, Axis Bank and HDFC Bank. Bhatt says SBI has 25 per cent of India’s banking market, but he is not standing still. He is aggressively seeking out new opportunities in wholesale banking, wealth management and financing of SMEs. “We are a universal bank,” he says.
Last year, the group added 1,000 new branches to its 180,000-branch network, and the number of ATMs increased by 10,000. The roll-out to reach many currently unbanked citizens continues. “We have reached 100,000 previously unbanked villages (of a total of 650,000). We will increase our reach through outsourcing technology to local groups, such as self-help organisations.”
Bhatt is also tapping into mobile phone technology to enable banking transactions. “This year, we hope to reach out to 50,000 more unbanked villages, and at least a similar number next year,” he says.
If Bhatt’s assessment of his country’s economic future is right, India could well have the last laugh. It was once subject to the sneers of its successful East Asian neighbours, sceptical that democracy could be compatible with rapid economic growth.
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