The Right to Grow
The Indian economy has been stress tested for the past year and a half, and we are now exhaling a collective but cautious sigh of relief. Yes, the economy has slowed down but we are still hanging in there at a 6.5+% growth, which is much better than what it was in 2000-2003. Also there do not appear to be any major cracks in the edifice of the global economic powerhouse that we are in the process of building. One must admit though that there is some merit to the often made argument that we have not been hit any less than everyone else, since the percentage decline in our GDP growth has been as severe as the economies in the world which have contracted. Hence, our slowdown is equivalent to their recession.
However, we have had no collapse of institutions, and what's more, consumer demand is up and about, although still a bit sluggish. The good news is that foreigners haven't deserted us, and inflows after taking out the FIIs and adding the NRIs remain good, and the stock market has bounced back and not wiped out anybody's future life. As a wag said last year, the only ones who really had a bad Diwali were the CNBC channel watching stock market aficionados in Mumbai. But even they have no cause to complain – in fact, many have made far more money than they lost, by buying at the bottom and riding the wave of recovery.
It is also a huge relief to know that our job losses were not as bad as people originally thought they might be. 1.3 million job losses (out of a labour force of 500 million) is the estimate so far, mostly in export sectors like textiles and gems and jewellery. As of February 09, the official figures were that only half a million had lost their jobs. And now that there is an uptick in exports, presumably the damage is under control.
Someone recently told me that different societies handle downturns differently. In Japan, everyone takes a proportionate haircut. In America, there are clear losers and winners. Presumably in India, because most of our workers are in the informal economy, we end up following the Japanese model, by default rather than design, of course! How we respond to economic hardships is certainly a debate worth having in our society. The hiring and firing of America and ruthless shutting down of businesses only to restart them in good times might not be our holy grail, given how bereft most of India is of any form of social security.
What has been the mood and behaviour of corporate India through all this? A foreign businessman who was visiting India earlier this year said that whenever he met Indian businessmen in a group, they would say business is really bad and the recession was on in full swing. Individually, however, they would admit that things were not too bad, that while they had seen far better days, but no, the bottom was not falling out of the market or their business.
An Economic Times report of October 2009 quoting a CMIE study said that, 'Despite the slowdown in the global economy and the bad monsoon, corporate India is likely to clock 22.8% growth in net profit in 2009-10 because of the improvement in margins due to a fall in input costs… Corporate sales growth [however] will average at a meager 4.1% in 2009-10. At the same time, profit after tax (PAT) will rise by a robust 22.8%.'
'From 35% in the first-half of 2008-09, its sales growth slumped to 12.1% and 0.1% in December 2008 and March 2009 quarters, respectively… However, the corporate houses managed to protect their profits from the impact of the global liquidity crisis as PAT rose by 16% in the March 2009 quarter and the growth further accelerated to 19.9% in the June 2009 quarter.'
From the ringside view I have of Indian business confidence, both as a market strategy consultant and as a board member, I notice an interesting mind game cycle that Indian companies go through. Like the stock broker, they are either bullish or bearish on consumer demand, creating larger swings in revenue growths than warranted. When they are bearish on it, they focus on growing the bottom line through cost cutting and operational efficiency improvement, and more or less give up on growing the top line.
They act as if the top line of their business is dependant on the performance of a third party called 'the market' which is out there, and they can only aspire to their natural share of it. They do not even consider the possibility that market growth is the result of the sum total of all companies' efforts to grow their individual top lines through strategic and tactical efforts to persuade the consumer to buy. Often even companies who control over 60% of the market in their category will state that their top line fell because the market did not grow, when in fact it was their non-performance that depressed market growth!
When they are bullish on consumer demand, they unfreeze and invest and push very hard to attract consumers and grow the market by converting non-users–new products, new geographies, new features, innovative and hard-hitting marketing communication, new distribution channels and so on. Even when input costs go up a lot and margins come under pressure, they often go to the other extreme and hold prices, betting that lower margins will be more than amply compensated by higher volumes and an increase in market share to boot.
They push consumer credit, rather imprudently, to push consumption of their products down to income levels where they should not really be going. When they turn bearish, they start unwinding all these, and end up depressing top line growth even more than normal. However, in the bearish phase, they do go to war on the flab they accumulated in the bullish phase, and emerge even more ready to play the bullish game when the time comes.
2000-2003 was a bearish phase for corporate India, when corporate bottom lines grew but not their top line, and companies got lean, mean and fit. Then came the golden years of 2003-2008, and we were back to top line growth (at all costs). That did drive profit growth, but made companies flabbier. Now, its back to focusing on profit growth through cost-cutting and extracting efficiencies, and the corporate results are testimony to that. A senior executive who worked for a company that was excellent at growing bottom line without top line growth once wryly commented on how 'cutting costs to the bone', if not done carefully, could end up 'cutting costs into the bone!'
As of today, large corporate India is sitting on enough capacity that it built, assuming that the environment, both global and local, of the boom years of 2003-08 will continue. However, it is still going ahead with investment plans that were anyway in the pipeline, partly downsizing for the new world, wherever possible. On new investment opportunities, it is cherry-picking.
If there's a deal or an expansion of opportunity, global or local, relating to any aspect of the business which looks attractive, it is being snapped up, surely and swiftly. Large corporate India's mood and conduct can best be described as pragmatic optimism and the pacing of a marathon runner. SMEs which are the bulwark of India business, however, are not in such great shape. Many of their business models are not so robust, and a combination of a slowing top line, higher receivables and inability to access loans has left many of them sick.
Consumer India's spending behaviour is not a cause for serious concern. It is a bit like large corporate India's investment behaviour–going ahead with whatever was part of an earlier plan, but delaying the timings a bit to manage the cash flows (buying the flat or the car that was booked), buying new things that absolutely have to be bought like replacing a busted new TV set, and doing the automatic upgrading that is part of every replacement purchase. However, consumers are not buying the first car or the second home, if it has not moved from the desire to the planning stage, before the downturn. While food prices are higher, they are a smaller proportion of middle and upper India's household budget and non-food price inflation is pretty low. Poor consumer India, however, is suffering, in particular, from food price inflation and a bad monsoon, even as it laps up cheaper telephone rates, and Chinese goods that are freely available at very low prices.