The price of uncertainty

CEOs continue to worry about the lack of policy and regulatory clarity, as well as exchange rate volatility, but not so much about growth

Last year, when chief executive officers (CEOs) met at the annual PwC-BS CEO Summit in New Delhi and Mumbai, there was a sense of despair over low growth and policy paralysis. A year later, when business leaders met in New Delhi at the PwC-BS CEO Summit on March 18, the mood was no different, despite the government having bitten the bullet on some key reforms. CEOs continue to be worried about policy and regulatory uncertainty, exchange rate volatility, rising costs, bribery and corruption, and protectionism.

''What worries us most is the uncertainty in policy,'' said Harsh Chitale, CEO, HCL Infosystems. Take financial inclusion: 600 million of India's population need to be brought under banking services, but Chitale said there have been so many policy flip-flops in the last one-and-a-half years on how they want to deal with it. He pointed out that there have been similar policy flip-flops in roads, power, and public-private partnerships.

''One of the reason why we don't see capital investment happening is this fear of uncertainty in policy,'' said Chitale. Either one government changes the decision of another, or one bureaucrat of the same government changes the policy of another; and if nobody is changing a decision, then someone else will question it. The next big worry for CEOs is exchange rate volatility, something on which they have little control.

An eminent panel, which included Indigo Airlines CEO Aditya Ghosh, Philips Electronics India Managing Director and CEO Rajeev Chopra, HCL Infosystems CEO Harsh Chitale and PwC India Chairman Deepak Kapoor, deliberated on the findings of the 16th PwC Annual Global CEO Survey. It found that Indian CEOs are more bullish on growth than their global peers. That's partly because, even at its slowest, India has grown at five to six per cent in recent times, said CEOs. (WHAT THE PANELISTS SAID)

''If you look at the psyche of CEOs, we have not had to take some of the painful decisions that Western CEOs had to take in the last few years. We have not had to lay off 50,000 people and slash union agreements,'' said Aditya Ghosh, CEO, Indigo Airlines. Indian CEOs have not faced a situation where their company was doing well, but the country's credit risk was downgraded and suddenly all financing disappeared for no fault of their own. This partly explains why there's a divergence in CEOs' outlook.

Given the low penetration of many products and services in the country, CEOs feel there's considerable headroom left for growth. As Chitale pointed out, half of India still doesn't have access to banking. Even in telephony, the penetration in rural India is only 38 per cent. There is a similar opportunity in education. ''Sector-wise, there's a lot of headroom for growth,'' said Chitale. In the short term, growth may have suffered in some sectors because of decision paralysis, indebted balance-sheets, or depreciation of the rupee, but in the medium term, there's a lot of headroom for growth in these sectors.

Segmenting the market always helps, as Philips India CEO Rajeev Chopra showed. ''We have always talked about a large Indian middle class, without realising that we have a few million people who are millionaires in any country. Even tapping those people could be an opportunity,'' said Chopra. No wonder, over the last nine to 12 months, Philips Electronics India has come out with specific offerings for those people. So, there are opportunities for growth. The question is, can they be done profitably? The key is to ensure that.

Companies should not get bogged down by GDP growth numbers, but should look at the growth in their addressable market. Take PwC, for instance, which caters to mid-size companies. ''If the bulk of the economy (say, agriculture and manufacturing) is growing at one to two per cent, our addressable market could be growing at 15-16 per cent,'' said PwC Chairman Deepak Kapoor, participating in the CEO panel discussion.

Costs are a concern, and CEOs want to ensure that costs don't go up more than profits. ''Many companies like us would say we would rather prioritise our bottomline over our topline,'' said Chopra. Airlines like Indigo are obsessed with costs and operational efficiencies, as they have no control over the dollar or the fuel costs. The rupee's fall saw Indian carriers' dollar-denominated costs rise 12 per cent in the last two years.

Companies have found novel ways to cut costs down. Take the IT and ITES sector. To keep manpower costs down, many firms in this sector are sourcing engineers from tier-II and tier-III institutes in the country rather than only tier-I institutes, and then training them to upgrade their skills. In this way, they have managed to bring down the full manpower costs for each entry-level engineer from Rs 3.25 - 3.50 lakh per year to Rs 1.60-1.80 lakh per year. ''You just have to cast the net wider,'' said Chitale.

This is no jugaad, but going beyond it (the theme of this year's panel discussion), and this is helping industry to stay competitive. ''Jugaad should be seen as trying to capture small ideas that happen on the ground and on the frontline. There has to be a systemic way of capturing those ideas, celebrating that culture of innovation, and in making it scalable - where you can apply it across a company, and where it can foster growth or efficiency,'' said Indigo Airlines' Ghosh.