Saturday, April 27, 2013

Meeting the sub-7 degree challenge

An economic slowdown is bad enough, and prevailing sentiment on India's prospects due to the oft cited 'policy paralysis' makes it worse. However, considering the long term demand potential, the profit leaders of India Inc. should take the lead in bringing investments, growth and faith back.

India’s growth engine slowed to a rate of 6.5% in the previous financial year, which presents India Inc. with what we call the sub-7o challenge (GDP growth falling below 7%). Perceptions of the country’s potential, though, went down by several notches. To be fair, optimism on India will continue to ebb and flow in future as well, but what remains unchanged is the paradox that characterises India. In the month of June, we became, most unwillingly, the flavour of global economic debate, when Standard & Poor’s revealed that we risked being the first among BRIC nations to lose our investment grade rating. Interestingly we receive this warning despite outgrowing Brazil ( GDP growth of 2.7%) and Russia (GDP growth of 4.3% in 2011)! In the same month, India, along with fellow BRIC nations pledged $75 billion to the IMF fund for the Eurozone, where the likes of S&P should be giving ‘rescue’ ratings and developing an altogether new scale. Some experts even project this as a fitting reply to the S&P rating! You do not need to look at the report to ascertain the rationale for this bearish sentiment. A government that predicted GDP growth of around 8.2% for the last fiscal initially, seems to be either too laid back or too constrained to make amends for the reduced figure, and the central bank isn’t helping either. But for the 50 basis points cut in April, RBI has kept interest rates high. The industry laments the RBI’s lack of concern for growth and fails to understand why interest rates are being kept high despite manufacturing inflation having come down. Unfortunately, if one looks at the HSBC Manufacturing Purchase Manager’s Index for June 2012, rate cuts could be delayed even further. The index read 55 in June compared to 54.8 in May, and

the report claims that input and output prices have risen significantly in June. Furthermore, a weak monsoon threatens an upward push to an already high WPI of 7.55% in May. However, delaying rate cuts has a detrimental effect from another perspective. High interest rates are leading to heightened incidence of debt defaults among SMEs, due to which toxic assets are entering our banking system at an alarming rate. Furthermore, investor uncertainty has reached new heights following the announcement of GAAR. Though it has been rolled back, no one is sure when it will return. There’s no timeline for the implementation of GST. Economists insist that FDI in retail could be a major step towards improving supply chain deficiencies in agriculture and bringing down inflation, but the government remains locked in a political logjam. Considering that there isn’t much fiscal room, urgent policy measures are needed to improve investor sentiment. India has received an impressive $36.5 billion in FDI equity inflows in FY 2011-12, a growth by 88% yoy (Department of Industrial Policy & Promotion). It’s important that this momentum is not lost.

Mention the word strategy to India Inc. and they would, with reasonable certainty, point an accusing finger towards monetary & fiscal policy. But then, even in this environment, there are businesses that continue to outperform. A look at our B&E Power 100 list this year as compared to the list five years ago provides some interesting insights. There are 32 new entrants, & some of the prominent ones include DLF, Jaypee Infratech, Adani Ports, Yes Bank, Axis Bank, Sun TV Network and Cadila Healthcare. Notable exits include Suzlon Energy, Reliance Communications, HCL Technologies, Unitech, MTNL, VSNL, Tata Tea, Tata Chemicals, Videocon & United Spirits. The reasons vary greatly, but the crux is that 68 members in the list have stayed the course and continue to be part of the list. And six of them remain in the top 10. Credit it to their world class practices, or their overwhelming hold on the market, they have managed to excel in the best & the worst of times.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
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