BackHow about some animal spirits, India Inc?
It is time for India's corporate sector to take a few punts on India's future
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With the Seventh Pay Commission’s goodies on their way and the forecast of an above-normal monsoon likely to trigger a recovery in consumer sentiment in the coming months, a consumption boom could be on the cards for India.
Domestic consumption is the fuel that powers the growth of the Indian economy. In 2014-15, it contributed a growth of 57% to the gross domestic product (GDP). But, given the decline in the growth of investment, as per the data released last month, it is debatable whether India’s companies are prepared for the coming boom.
For over five years, government inaction, the aftermath of the financial crisis and stagnant domestic consumption gave private Indian companies the perfect alibi to keep their investment purse strings firmly fastened. There is little to suggest these are being loosened.
Bankers, citing a low risk-reward ratio, stress that in an environment where most companies are looking merely to refinance or restructure existing loans, there are few proposals seeking funds to finance new projects. There are, of course, those companies that made dangerous plays in the heady years of 2002-07 and whose balance sheets are already groaning with debt, ruling out further borrowings. But even among companies which have been more conservative, greenfield investment has been something of an anathema.
That’s a pity. As Angel Gurria, secretary-general of the Organisation for Economic Cooperation and Development (OECD), put it eloquently, “Today’s investment is tomorrow’s growth." China’s growth through its golden run was driven primarily by investments made ahead of demand. In India, the time to anticipate that demand is now.
In a research report titled India Consumer Close-Up, Goldman Sachs says India’s consumer story in the coming 5-10 years will be shaped by its 440 million millennials (those who were young adults around 2000) and 390 million Gen Z (those born after 2000). What new products and services are the largest companies thinking of providing this emerging new class of Indian consumers?
The past year-and-a-half presented a surprising window for the Indian economy as Chinese growth sputtered, leading to a collapse in prices of essential commodities. But as China goes back into investment mode, these prices will recover, leading to inflationary pressures and less disposable incomes in commodity importers such as India.
India certainly has its problems—a notoriously slow bureaucracy, creaking and woefully inadequate infrastructure, and too much regulation, for starters—that need to be addressed for economic growth to take off. But these are not intractable issues. Most businessmen now accept that bureaucrats, under instructions from their political masters, are willing to get things done.
As for infrastructure, sitting back and waiting for the government to put everything in place is to not recognize that it is a massive opportunity waiting to be tapped.
Till the 1990s, telecom was one of India’s biggest infrastructure gaps. So were airports. Think back to the time when getting a phone call through to another city needed hours of trying by an operator, and getting a ticket on the choked Indian Airlines flights was a huge task.
Today, both of these are available on demand and in the bargain a whole host of exciting new private companies such as Bharti Airtel and IndiGo have been born. It is the same sort of challenge that roads, railways, power, clean water and efficient public transport present today.
The government has set a target of $1 trillion in infrastructure spending for the Twelfth Five-Year Plan period running from 2012 to 2017, calling for the private sector to fund half of these infrastructure investments through public-private partnerships (PPP).
A recent report by KPMG titled India soars high says that the various steps taken by the government are expected to unlock major investment opportunities. The report goes on to say, “In a scenario where the nominal GDP is expected to reach $3.4 trillion by FY2019-20 and further, to $7 trillion by FY2024-25, the stakes for the return on investments is expected to be significantly high."
Risk aversion in the corporate context isn’t such a bad thing. The excesses of the past decade did produce the vast swathes of debt that have crippled the banking system, and at a time when companies are desperately trying to ward of defaults, taking costly bets on the future may sound counter-intuitive. Yet, this is the time for large Indian groups to unleash what former prime minister Manmohan Singh once called “animal spirits". Even if the expression didn’t quite fit his gentle personality, it described best what is needed today.
The frenzied build-up of debt in the past decade is unlikely to happen again partly because companies don’t have the appetite for it and partly because the easy-money regime of that era isn’t likely to appear again. But smart investment plays, particularly those that leverage innovation and new technologies, are a recipe for growth. The electric and hybrid vehicle industry in India is virtually non-existent. A new generation of Indians may be ready to embrace environmentally friendly vehicles. But look around us—most car makers are content to play catch up with each other and release fuel-guzzling SUVs.
India’s IT giants are flush with cash reserves, yet content to chug along doing pretty much what they have been doing over the past 15-20 years even as a Google carves out Alphabet from itself with the avowed aim of pursuing “moon shots".
It is time for India’s corporate sector to take a few punts on the country’s future.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. Corporate Outsider will look at current issues and trends in the corporate sector every week.
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