Subir Roy: Lessons from recession, road ahead

A list of lessons from the last two years to avoid past errors and lay the foundations for a medium-term strategy.

Now that a clear recovery is on the way and India can expect to go back to the trend path of 8 per cent growth next year (2010-11), it is necessary to list the lessons from the last two years to avoid past errors and lay the foundations for a medium-term strategy.

The cardinal lesson for the corporate sector is: Do not borrow heavily to make acquisitions, and that too overseas. The travails that firms like Wockhardt and Suzlon Energy have had to pass through bear this out. Preliminary indications are that the lesson has been learnt. Indian firms in the last year have gone in for extensive equity-raising as soon as global liquidity conditions eased and have laid out plans for record raising in 2010.  

The other lesson for corporate India is that it may be better to look inward, not outward, for a promising future, without raising barriers at the border. While the economy as a whole has struggled with the slowdown, FMCG firms have enjoyed buoyant rural demand. So the way to de-risk your business from the vagaries of the business cycle in India may be to cater to the bottom of the pyramid.

This is, of course, not a recipe for everyone. Take apparel exports. Not everyone should target the low-value-high-volume market; compete with Bangladesh in stitching shirts for export. A successful higher value global vendor like Gokaldas Exports should not change its business model and has to simply ride out the recession. But for that you need deep pockets and business maturity. The country parallel is export-led South Korea which suffered a severe setback in the 1997 Asian financial crisis but rebounded dramatically thereafter.

In determining its medium-term strategy on the basis of these insights, corporate India faces a contradiction. In an inexorably more globalising world, it will have to be more at home than abroad. Tariff barriers are already on way to being lowered through the free trade agreements with Asean and Korea and will go down further as an agreement, now being negotiated with Japan, is eventually concluded. This will bring global competition not just to India’s doorstep but right within its courtyard. And to this, over time, will be added the even more serious challenge of Chinese goods. The Indian marketplace will be far more contested even as it becomes as critical for global economic growth as the Chinese.

Corporate India will have to survive this with two major strategies. One is via the traditional route of improving competitiveness which is an unending journey. The other will be a vast expansion of the financial sector which will play a key role in raising incomes and enhancing consumption among the poorest, in rural as well as urban India. In addressing this potentially massive new market, corporate India will have an advantage vis-à-vis global challengers for two reasons — better local knowledge and greater logistical prowess.

The expansion in the financial sector will walk on two legs — financial inclusion and microcredit expansion. The winners in this great battle will be products innovated for India. The future will lie with products like the sub-Rs 1,000 water purified recently launched by the Tatas and the many innovations that IT MNC labs in India are working on for the neo-literate cell-phone user. Conceptually, the Nano and the car being designed by Maruti Suzuki for India belong to the same genre — entry-level products developed for the Indian market.

Financial inclusion, whose burden is being carried mainly by the nationalised banks, currently appears to be a non-starter. Witness the number and fate of the no-frills accounts. To have the courage to build plans for the future on such a currently weak foundation, it is necessary to put the present in a historical context. The rapid branch expansion after bank nationalisation was hugely loss-making for the banks and was seen by the middle class and free market analysts as a wound that bled public resources to fulfil the political agenda of Indira Gandhi. Only with hindsight do we know that the branch expansion played a key role in raising the national savings rate, thus laying the foundation for future growth. Financial inclusion, by enabling and strengthening the delivery mechanism for payments for improving social security and employment programmes, will facilitate income generation and consumption at the bottom of the pyramid.

To this has to be added a vastly bigger play by microfinance agencies, which are now a viable business model with low delinquency rates and thus attracting global funding. Raising microfinance lending by many factors of magnitude will give a further big push to income generation and consumption at the bottom of the pyramid. But for both no-frills accounts and microfinance lending to grow rapidly, IT-led business processes will have to be innovated to crash transaction costs. Thus, looking inward, innovating for the Indian market, and IT-led innovation to make possible no-frills accounts and microfinance loans will be key elements of the medium-term strategy for corporate India.

subir.roy@bsmail.in