India:
Everything to Play for
Global Economics
October 2007
With the right reforms, India couldgrow at 10% for a decade
John Llewellyn, Robert Subbaraman, Alastair Newton and Sonal Varma
Lehman Brothers |
India: Everything to play for October 20071
FOREWORD
Lehman Brothers has had a long association with India – both through its own presencein the country, and through the many Indian nationals who work for us, including the2000 staff we have in our knowledge center in Powai. But, as India’s impressiveeconomic expansion gained momentum, the question naturally arose whether our presence in India was of sufficient scale, or whether we should raise it by a quantumleap.Such a decision is never to be taken lightly; and certainly we did not. First and foremost,we had to decide whether India’s recent growth upsurge was likely to prove temporary,as some commentators at the time were suggesting, or whether it had a chance of becoming self-sustaining.Accordingly, we embarked on a detailed and lengthy evaluation of the prospects for India’s economy, Indian financial markets, and Indian governance. We were encouraged by what we found. India’s rapid growth of the past several years, we concluded, bears allthe hallmarks of the sort of economic take-off that, in earlier decades, had taken placeelsewhere in Asia, and stunned a world that until then had thought that single-digitgrowth was the most that any economy could achieve.In short, we concluded that India’s growth could not, and should not, be dismissed as aflash in the pan. But our research also led us to conclude that a continuation of recent fastgrowth is not automatically guaranteed: just as this growth is the result of importantstructural policy reform, so will future growth be shaped, in respect both of its rate andits quality.In this respect, India is no different from, and cannot escape the challenges faced by,other successful economies, whether developed or developing: in a world of rapidtechnological change, changing tastes, global competition, climate change, and myriadother challenges, economies need continually to adapt. And the structure of countries’governance has to lead this, if economies are to realise their full potential.India has learned a great deal from its structural policy reforms of the past decade; andwe suspect strongly – though it is not guaranteed – that these lessons will be carriedforward, and built upon, in the coming years. And it is on that basis that we judge thatIndia’s economy has the potential to grow at 10% or so annually over the comingdecade. Consistent with being one of the world’s fastest growing economies, India islikely to attract substantial foreign investment, and its local capital markets haveenormous growth potential.Hence it is fitting that we are releasing this report, which contains a good part of our thinking as we approach the first anniversary of the opening of our new office inMumbai, Ceejay House. In this short period of time, we have already created a full scaleinvestment banking, securities trading and private equity business, a clear vote of confidence in the economic and social future of India – a future in which we at LehmanBrothers fully intend to play a large and growing part.Tarun Jotwani
Chairman and CEO of Lehman Brothers, India
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ON PAGE 171 OF THIS REPORT
Lehman Brothers |
India: Everything to play for October 20072
ACKNOWLEDGEMENTS
This study owes to many people.It all started with the head of global research at Lehman Brothers, Ravi Mattu, saying “Ithink that something pretty interesting is going on in India. But why don’t you go thereand look for yourself. Talk to people, make up your own mind, and write what youconclude.” So we did: one could not ask for a fairer mandate, nor a more interesting one.That was getting on for two years ago. In the intervening period, many people havehelped. Senior members of the Government of India, of the Reserve Bank of India, andof the regulatory authorities all made themselves readily available and spoke withimpressive openness. The Confederation of Indian Industry arranged for us to meet ahost of representatives of different industries and other experts, who likewise invariablyspoke with candour.Sir Michael Arthur, the then British High Commissioner and himself no mean scholar of India, together with his staff, generously arranged for us to talk usefully with a wider cross section of Indian society than we could ever have managed by ourselves; and UK Trade and Investment set up instructive meetings for us not only in Delhi and Mumbai but indeed throughout India.We are also indebted to many Indian economists for their frank discussions and debates,including Priya Basu (World Bank), Subir Gokarn (CRISIL), Pulin Nayak (Delhi Schoolof Economics), Ila Patnaik and Ajay Shah (National Institute for Public Finance andPolicy), Ajit Ranade (Aditya Birla Group) and Shubhada Rao (Yes Bank). Dr VikramAkula, CEO of SKS Microfinance, was kind enough to talk us through the world of microfinance. And we are grateful for illuminating discussions with Peter Wonacott(
Asian Wall Street Journal
), and Jo Johnson and Amy Yee (
Financial Times
).The global world being what it is, we also received advice, encouragement, andinformation from outside India’s borders, particularly from The Indian HighCommission in London, and staff at Chatham House and the International Institute for Strategic Studies. And we had two particularly useful discussions with Richard Herd of the Organisation for Economic Cooperation and DevelopmentSanjeev Kaushik and Chimon Fernandes of the Lehman Brothers’ Mumbai officearranged many meetings with interesting organisations, and helped with an array of logistical issues. Julia Giese did a significant amount of the early research work beforeshe left the Lehman Brothers London office to start on her DPhil at Oxford.Authors of particular parts are in general acknowledged in their respective sections: butspecific mention should be made of Camille Chaix for her contribution on climatechange, and Evdokia Karra and Melissa Kidd for their contributions on carbon tradingand the clean development mechanism.Lehman Brothers’ Global Chief Economist, Paul Sheard, encouraged us throughout and,near the end, read the study through in its near entirety. And Valerie Monchi and her team looked after the full range of technical issues, from editing to layout to production.We have sought to document everything that we say in the report, to the greatest extent possible; and we have endeavoured to make judgements explicit, so that the reader candecide. But, as always, there are the inevitable errors. The responsibility here rests withus, and us alone.The cut off date for information in this report is 5 October 2007.
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