Keki Mistry, CEO, Housing Development Finance Corporation on the unfolding story of India

Keki Mistry, CEO, Housing Development Finance Corporation on the unfolding story of India

In today’s address, I would like to share my views on the Indian economy and my perspective on India’s immense growth potential. The financial sector, which is hugely underpenetrated (I’ll talk a little more about that later), will play a crucial role in leading India’s growth story, as finance serves as the backbone of any economy anywhere in the world. Against the uncertain global backdrop, India has increasingly been in the spotlight for being the fastest-growing major economy. I am extremely optimistic about the future of our economy. India’s economic growth has surpassed global expectations, as it was much better able to manage its economy due to a confluence of factors such as sound government policies, strong macroeconomic fundamentals, inherent domestic demand, an extremely successful vaccination drive during the COVID period, timely regulatory interventions, and continued reforms which have ensured India’s long-term growth.

In recent years, India’s economic growth has urpassed expectations. At the onset of COVID-19,
RBI was proactive with its monetary easing and liquidity support, and I think RBI really needs to be
commended for the host of measures it introduced. During the peak of the COVID crisis, in order to
augment liquidity in the system, RBI reduced the reverse repo rate, cut the cash reserve requirement,
conducted targeted long-term repo operations, and introduced refinancing facilities for financial
institutions.

The gradual lifting of the lockdown restrictions by states saw both demand and consumer confidence
come back very sharply from September 2020. There has been really no looking back thereafter, excepting for a very short period of time when you had the impact of the second wave of COVID. And the
government has increased the GDP target for the year from 6.5% to 7.6%. In fact, the GDP growth for
quarter three, for the financial year for the current year, the third quarter, far exceeded the analysts’
expectations by growing at a very impressive 8.4%.

Now, you must understand that this 8.4% compares to global averages, which are significantly lower. If
you look at the Western countries, the growth rate would typically be in the 2-3% range. In that context,
we are at 8.4%, foreign investors acknowledging India’s growth prospects. India as an emerging market
clearly stands out. The IMF has estimated India’s GDP growth to be 6.7% during the year, which will
ensure that India remains the fastest-growing large economy in the world. However, in my view, the IMF
is significantly underestimating India’s growth.

The onset of the Russia-Ukraine war saw spiralling oil prices, and inflation started hitting the Indian
economy from April 2022. RBI reined in inflation through a series of calibrated measures. RBI has
increased the repo rate by 250 basis points, which is 2.5%, since May 2022 to a current level of 6.5%.
To further contain inflation, RBI has focused on withdrawing excess liquidity in a gradual and nondisruptive manner. As a result of such measures, average surplus liquidity has fallen steadily from about rupees 7.8 trillion in January and February 2022 to an average liquidity deficit now, of about one trillion rupees.

Inflation has largely been reined in and stood at 5.09% in February 2024, with core inflation being under
4%. This shows that RBI’s disinflationary monetary policy is working its way through the economy. The
Finance Ministry also needs to be commended for not becoming overzealous in its stimulus package
during the pandemic. If India had not kept the fiscal positioning check during the pandemic, inflation
levels could have been out of control as we have seen n most of the Western economies. In my opinion,
both the government and the RBI did a truly outstanding job in managing the economy during
the last four years. This has contributed again in my view in a very significant manner in making India the fastest-growing major economy in the world.

I truly believe that there is no better place to be in the world than in India right now. I talk to international investors regularly and during my interaction with them, the feedback about India is extremely positive.

The image of India has improved by leaps and bounds. A major part of this positive image stems
from the efforts being made to improve the business environment by bringing in greater transparency
through a stable and fair regulatory regime. India as an emerging market clearly stands out from the
others. Foreign investors acknowledge India’s growth prospects and are appreciating the policy measures that are being implemented. These policies are aimed at improving the day-to-day lives of people and capitalising on geopolitically triggered shifts wherein India can become a preferred destination in the supply chain of major global companies.

There is also a huge trust on digitisation across all sectors of the economy, especially in the financial
sector. There are several important indicators which reflect India’s strength in the global economy. There is no other economy in the world today that currently has the capacity to absorb the scale of investments that India can, or has the growth potential that India offers.

I would like to highlight some of these facts. Firstly, India’s favourable demographics.

• India accounts for 17 percent of the world’s population, which means that one out of every
sixth person in the world is an Indian.
• More importantly, 66 percent of this population is below the age of 35 years.
• Secondly, India’s middle class is estimated to rise from about 250 million individuals currently to
about 800 million by 2030.
• India is a domestic consumption-based economy with private consumption forming more than 50%
of the economy.
• According to a report by Morgan Stanley, India will become the third largest economy globally
by 2030. It is estimated that the number of households with incomes in excess of Rs. 30 lakhs per annum will rise five-fold to 25 million by 2031.
• Further, the per capita income is expected to rise from about US $2,300 currently to about US
$5,200.
• India is poised to become the third largest consumer market behind the US and China.
• Consumer spending in India is expected to grow from about US $1.5 trillion at present to nearly
US $6 trillion by 2030.

• There is strong growth in high-frequency indicators such as E-way bills, railway freight,
highway toll collections and GST collections. For example, GST collections grew by 12.5% year-onyear to 1.68 trillion as of last count. And we have seen now that for 32 consecutive months the GST
collection has been in excess of rupees 1 trillion.

• The government has kept the fiscal deficit under
control. For financial year 2024, India’s fiscal
deficit has been revised downwards to 5.8% from
the earlier estimate of 5.9% of the GDP.

• According to the Finance Minister, the budgetary
deficit is expected to be further moderated to
5.1% of the GDP in the financial year 2025.
Now you must know that lower fiscal deficit will
mean reduction in inflation because there is lesser
amount of government borrowing.

• One needs to commend the government for not
introducing populist measures during an election
year. Further, India’s external debt is extremely
manageable at 18.6% of GDP and is the lowest
amongst the major economies worldwide, and
particularly the emerging markets.

• Bank credit in India has picked up over the past
year and has remained in double digits since April
2022.

• As of end January 2024, the overall bank credit
grew by 16.1%.

• Retail credit growth was strong as well, with
personal loans growing by 18.4% and housing
loans by 16.7%.

• Whilst deposit growth has not picked up with the
same pace as credit growth, banks are intensifying
their deposit collections to meet the credit
demand.

• The Indian banking system has been very resilient.
Since March 2021, there has been a steady
decline in the NPA ratios of banks. They have
declined from 7.3 per cent in March 2021 to a
decade low of 3.9 per cent in March 2023, and
as of September 2023, NPA levels have further
improved to 3.2 per cent.

• The balance sheets of the corporate sector are now
significantly stronger with a much lower level of
leverage than what it historically used to be.
• The RBI is acknowledged globally for its extremely
effective supervision of the Indian financial sector
and for guiding economic growth without the
high inflation that the Western countries are
facing.

• The RBI has been extremely proactive. In
November 2023, RBI increased the risk rates on
unsecured loans by 25 basis points for banks and
NBFCs. This was done in order to prevent any
systemic risk that these types of loans could pose
in the future.

• India’s foreign exchange reserves are at a very
comfortable level of about US $626 billion as of
early March 2024, which covers over 11 months
of imports. This makes India the fourth largest
holder of reserves in the world after China, Japan
and Switzerland.

• Further, India achieved record remittances from
non-resident Indians, which touched about US
$107 billion during the financial year 2023. In the
first half of financial year 2024, inward remittances
had crossed US $48 billion.

• The RBI has intervened time and again to support
the rupee so as to contain volatility and ensure
orderly movement of the currency. Measures are
being implemented to ensure macroeconomic and
financial stability.

• Over the past one year, the rupee has been stable
by and large and has been in the 82.5 to US $83.5
range. Until March 12, 2024, the rupee had
depreciated by 0.6% against a US $1 on a year-onyear basis compared to a 4.8% depreciation in the
Chinese Yuan.
• 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 between 20% and 30% in
East Asian economies, 69% in the UK and 52%
in the US. We are only at 11%, which means
the penetration levels are so low that the growth
opportunities that you would see in the years
ahead will be enormous. Similarly, you will see that with all financial service
products, not just mortgages. I am not giving you
the other data, but if you look at consumer loans,
look at car loans, look at any financial product,
penetration levels are very low.

• Insurance penetration in India stands at 4.2% of
GDP compared to a global average of 7%.

• Similarly, India’s mutual fund penetration is
only 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 enormous.

• There is a huge potential for more youngsters to
become patient long-term investors in equities
and mutual funds. We are moving in the right
direction. For example, in 2014, the combined
assets and the management of all mutual funds
hit the 10 trillion rupee mark. In just three years,
in 2017, it doubled to 20 trillion. As of February
2024, the assets and the management of mutual
funds touched an all-time high of rupees 54.5
trillion. Interestingly, 57% of the industry investor
base are retail investors.

• Indian equity markets are the most favoured
amongst emerging markets. For instance, over the
last 12 months till March 12, 2024, Indian stock
markets have grown by about 27-31% depending
on which index you are looking at, while Shanghai
had a decline, not a growth, a decline of 7% during
the same period.

It took the Bombay Stock Exchange 21 years from
1986 to December 2007 for the Sensex to touch
20,000 points. From February 2020, which is a month
before the pandemic hit India, till now, the Bombay
Stock Exchange Sensex has increased from the 40,000
mark to over 73,000 points currently, which is a nearly
80% increase.

With the increase in penetration of smartphones and
with internet connections facilitating ease of doing
online transactions, there has been a sharp increase
in D-mat accounts from about 40 million in the
financial year 2020 to nearly 139 million currently.
This is a nearly three-and-a-half-time increase. The
financialization of savings augurs well for the Indian
economy.

Flagship government programmes such as the  JAM Treaty, which is Jan Dhan-Aadhaar-Mobile
technology have helped in implementing direct
benefit transfers on a massive scale.

The introduction of a unified payment interface that
allows customers to make digital payments using
a smartphone is helping India to transform into a
cashless society. UPI is the most preferred payment
product by volume, accounting for 75% of the total
transactions during the financial year 2023.
According to a report by PricewaterhouseCoopers
India, UPI will achieve a milestone of 1 billion daily
transactions by 2027.
Lastly, India is expected to be a $1 trillion digital
economy in the financial year 2027; this will be one
fifth of the total economy at that point in time.
I do believe that India’s pace of reforms will continue;
sound regulatory policies and implementing structural
reforms will help India attain even faster economic
growth in the years to come.
Now, the one key challenge that India faces is its
dependence on oil. The trajectory of oil prices needs
to be watched closely as India imports over 80% of
its oil requirement and is the third-largest importer
of oil in the world. Oil prices have a direct impact on
both inflation, the current account deficit, and the
GDP. According to a report by CII, a $10 increase in
oil prices reduces GDP by about 30 basis points. A
10% increase in crude oil prices puts a 20-25% upside
risk on inflation. For every $10 increase in oil prices,
inflation is estimated to increase by 37 basis points
and the current account deficit by nearly 30%. Thus,
the Oil Import Bill has a very large influence on India’s
current account deficit. You may have read that India
has been included in the Global Bond Index, and this
will immensely help strengthen the rupee over the
long term.

India will be included in the JP Morgan Global Bond Index in June 2024 and in the Bloomberg Global Aggregate Bond Index from January 2025. Various estimates suggest that India’s inclusion in the global bond indices will attract amounts in the range of about 25 to 30 billion US dollars annually to begin with and rise to about 50 to 60 billion US dollars subsequently. According to estimates again by Morgan Stanley, India’s bond inclusion could attract foreign investment of between US dollars 170 to 250 billion over the next decade. However, FDI flows in India’s debt market have many advantages, so it’s important to understand these.

– Firstly, there will be greater demand for Indian government securities which will lead to higher
prices and lower yields and this will result in cheaper government borrowing and therefore help the fiscal position.
– Secondly, it will help the government to fund more infrastructure projects which will result in more job creation.
– Thirdly, corporate bond yields will come down as they are all benchmarked to the GSA yield. – Fourthly, more flows into government bonds will mean more liquidity available for banks to lend.- And last but not least, foreign fund flows will steady the foreign exchange market. This may partially obviate the necessity for RBI to increase interest rates to counter any future increase in interest rates by the US Fed.

In conclusion, the macroeconomic fundamentals in India remain extremely strong, consumption trends will sustain, and India should continue to leverage its strength in technology. I expect the reform process to continue in the months and years ahead. A strong government focused on growth, a very well-regulated system, and enormous growth opportunities in the economy make India the perfect destination for foreign capital. India is continuing to climb up the growth ladder. I remain extremely optimistic about India’s economy. India has a strong domestic consumption-based economy, and penetration levels are so low in India that the scope for businesses to grow is enormous.

Several global leaders have unanimously said that India is probably the most attractive destination for
foreign investment. India’s young population offers a huge opportunity for growth, and in that sense, we are less dependent on global factors than most othercountries. I truly believe that as long as we continueto focus on financial sector reforms and enablingpolicies, India will continue to grow from strength to strength on the global stage.