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Spooking Ourselves into a Slowdown

Business Standard Mumbai, Weekend 18 June, 2011

Dear Corporate India, why is there so much overt panic about an impending "slowdown" and "policy paralysis" at the centre and unfriendly (to whom?) rate hikes by the Reserve Bank of India (RBI)? It seems to echo the days of the global meltdown when a puzzled foreign investor asked me how it was that all the companies he had met, collectively said things were in a bad way, but individually and privately said things weren't too bad. Maybe it's just the business media that doesn't seem to have a handle on things! Thursday's headlines in one paper was about such a collective view of bankers about bad times, but Friday's interview by the head of HDFC Bank – a balanced and mature high-performing organization by any yard stick – was very calm. He said, "Bad debts come when you have a tremendous fall in growth rate that is unexpected. Half percent reduction in growth is not anything to be so worried about. From 8.5 percent to 8 percent or 7.75 percent in my view is no big deal." On the other hand, there are those who believe that the sheer momentum of the Indian economy will keep growth safe and ticking, and I tend to agree with that, not just because it is good news, but because it takes a broader view of the broader Indian economy. Corporate India, including the financial services sector, has been telling investors that the India story is strong, that we must distinguish between annoying squalls, and devastating "twisters" and that the economy is quite safe from the politics. What's changed now? Why are we spooking ourselves and depressing confidence so severely?

Perhaps the business plans, cast in the days of unbridled optimism of the 2010-11 are not being met and the master of the stock market is not going to be pleased? Perhaps business cycles and environmental pressures are things that we having to deal with more often, than in the past decade, and as a bigger economy, we are now beginning to feel the heat, and to ask for smooth sailing, upward driving tail winds all the time is wishful, and greedy? Perhaps the business planning process needs to be revisited – is there sufficient attention to what the environment is really going to be like, and what the right target number should be? Or do we decide that we must, just must, do a certain growth rate on certain parameters and then blame it all on the environment when it doesn't happen? At the end of 2010-11, there was a general air of euphoria. Not being ravaged by the global meltdown and doing "ok, considering the situation" in 2009-10, and then being among the star-performer economies of the world in 2010-11 much to our own surprise, was reason to celebrate. Yes, 2010-11 was a year that had its worries, and CEOs said with rising input costs, tighter or more expensive money, and inflation making consumers append more on essentials, they worried about margins and about consumer demand weakening. Yet corporate India, including the banking sector did very well last year. They did pass on costs to consumers, the curate's egg "good in parts" nature of India turned in enough good news for good cheer, and the rural economy continued to do well, the rain-god helped and we have worries about storage of food produced rather than food production per se. The insurance sector and the mutual funds business would probably have felt better had there been more policy paralysis!

What about infrastructure projects getting delayed, Foreign Direct Investment (FDI) not coming? Yes to both, the facts speak for themselves. Will it ever happen? Yes, it will.

Perhaps the lesson here is to pay more attention to the business portfolio at the portfolio level, ensuring that there are enough diverse bets of varying degrees of commitment placed when developing strategy and business plans. In some wonderful writing on developing strategy in uncertainty, McKinsey says there are different kinds of uncertainty – many of the uncertainties in India seem to be in the genre of "we are certain that they will happen, but we are not sure when". So if a retail business has bet its future on FDI being permitted and hence expanded beyond what it is justified doing on the basis of business logic, then yes, policy paralysis is a problem. The retail sector has enough opportunities and more that does not need FDI to be pursued; it needs to work with Indian investors and lenders, teaching them how to evaluate the business. FDI in insurance is not going to change the strategic fortunes of the private insurance businesses. Developing the right product suite and moving from a transaction to a relationship mindset will help generate good quality growth. A lending institution that decides that it will be heavy on infrastructure in India must do a reality check, beyond consultant reports, on estimating the pattern and speed of flows – and in any case infrastructure business is a long-term nurture sector and needs to be treated as such – with other sectors in the portfolio that take can deliver smaller, but more certain growth targets.

Perhaps corporate India should believe the story it tells outside investors – that this is a long haul market, slow-burn but steady burn, there is a pot of gold, bigger than almost anywhere else, at the end of a hot, dusty uncomfortable journey; the country has many people constituencies, and yes, choices between inflation and growth, between corporate business value and aam aadmi's ability to live comfortably will forever have to be made, and that doing business in such a complex multi-part country needs a great deal of complex yet sharp strategy.