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Time to Get Focused

Omkar Goswami

Yes, there is a global liquidity crisis. Yes, world trade is slowing down. Yes, we are into a down cycle. But, given the shrillness of the news commentaries, we need to ask, “Is it the end of the road for India and for Indian businesses?”

As a starter, let’s get a perspective on GDP growth. Even in the worst case scenario, India’s growth for 2008-09 will be over 7%. I am willing to bet on 7.5% growth. Where does that put us?

Among economies with GDP over US$ 1 trillion, only three countries will grow higher than 7% in 2008. These are: China with a GDP of $ 4 trillion at 9.7%, India with a GDP of $ 1.3 trillion at 7.5%, and Russia with a GDP of $ 1.7 trillion at around 7.3%. No other country comes close.

It is true that growth compression of 150 basis points from 9% to 7.5% will cause pain in terms of lower investment and employment growth and a tougher business environment. Also, those whose fortunes depend upon the US, the UK and the EU will be more hit than the others who ply their trade in the domestic markets. Even within India, some businesses will be more affected than others.

But it is not a recession. It is a slowing down of growth from 9% to 7.5%. Which is way better than what it was in India in 2000-01 when growth was down to 4.4%, or 2002-03, when it dipped even further to 4%.

What should Indian companies be doing in these times? It is all about going back to the basics — the things that all good companies know of, but may have forgotten in the froth of 9% plus GDP growth. Here are some of these basics:

• Profits are opinions; cash in bank is fact. So says Infosys’ chairman, N.R. Narayana Murthy — a saying that should define everything that we do in business.
• There are only two metrics for corporate success: per capita revenue productivity and per capita cost productivity. Another Murthy saying that is well worth taking seriously.
• Back to the basics: optimise supply chains, improve revenue turns, squeeze more out of the turnover to fixed assets ratio, cut down working capital needs per rupee of sales, slash every item of inessential expenditure.
• Go for productivity increases everywhere. These hide in good times. Find them in the woodwork and take them to centre-stage.
• Control receivables like never before. Make that rupee come in faster, and keep it longer. Make maximising ROCE the mantra of your company.
• The client is Lakshmi. He who walks with her in bad times will win her loyalty in the good times.
• Think and act like a true Marwari. He who optimises cash wins.

I have no serious concerns about the micro of doing business. It is the macro where I worry. Despite an expected growth rate of 7.5% in 2008-09, I have three anxieties.

• First, public spend on infrastructure. Either in December 2008 or in January 2009, the national elections will be announced. Immediately, the Chief Election Commissioner will call a halt on all government projects. Bureaucrats will interpret this to cover ongoing projects. The ministers will be away from work. Economic governance will come to a halt. Infrastructure spends won’t get going until June 2008, when a new government is formed. It happened the last time. Therefore, we should do anything to prevent it from repeating itself. India can’t afford it.
• Second, the fiscal deficit which, for the centre, will be 4.5%-4.8% of GDP for 2008-09. Add to that state deficits of 4%, and we are looking at unsustainable medium term numbers. It is easy to say that we should spend our way out of trouble. The fact is that we don’t have fiscal surpluses to allow us to be as Keynesian as China can. We should worry about what this deficit means for tomorrow’s growth.
• Third, the quality of governance. We will have a coalition government at the centre in 2009. The question: How badly fractured and dysfunctional? If it is worse than today’s, there will be a price to pay in terms of growth.

Even so, there’s hope. We are in a golden era of entrepreneurship. We achieve some of the best EBITDA, EBIT and ROCE margins in the world. A GDP growth rate of 7.5%, or 7%, or 6.5% (take your pick) is not trivial. Most Indian companies know how to do the right things in times of trouble — and many will come out stronger than before. The RBI and SEBI have been proactive. And there is some insulation: domestic consumption accounts for 68% of GDP; and we don’t have full capital account convertibility. So, let’s not trash India.

Published: Business Standard, November 2008


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