The country’s solid GDP growth of some 7 per cent in 2011 has far outpaced the faltering expansions in the USA and the EU. Second only to China as the emerging market destination of choice for the global PE, India has seen PE investments grow substantially last year. Moreover, the high GDP growth has proven to be a magnet for attracting capital for the Indian private equity. However, growth is not a given and investors should not get complacent about it, warns Dr Arvind Vermani, executive director (India), International Monetary Fund. In an exclusive video interaction, Vermani has pointed how India Inc got swayed away with 8-9 per cent growth numbers, thinking it’s a given and that any number (even 12 per cent) is achievable. “This is the wrong way to go,” he asserts. Vermani is of the view that the country’s growth potential is still 8-9 per cent and it could be achieved by “addressing the bottlenecks and not by ignoring those.”
Some of these bottlenecks are a result of high growth itself. “When you grow very fast, you don’t pay enough attention to solve the problems. We were able to generate a higher level of investment. But fast-paced growth is creating new problems and unless we solve those, growth will again slow down,” says Vermani who specialises in the study of high growth economies. This is only true as high GDP growth has not really translated into high returns for investors as much as they have anticipated and there are also a host of structural issues – delays in implementation, enforceability of contracts, inefficient policy and lack of privatisation, which are the “low hanging fruits” and marring the growth.
China’s outperformance is another reason for Indian private equity woes. However, Vermani has cautioned the investors who compare India with China – for the right or the wrong reasons. “The fact that China is doing so well and people are making so much money is partly because it is three times the scale,” he explains. And he goes on to warn investors to take note of the difference between the average and the absolute. The Indian growth model is much more sustainable than the current Chinese model. “I have made a prediction that India’s rate of growth will be higher than that of China in the middle of this decade and I stand by it,” he concludes.