In less than a year, that is as 2010 dawns, the Indian economy should be out of the woods and on a clear recovery path. Corporate India should then be in a position to think bold thoughts again and plan for growth and investment. It is therefore necessary to ask right now what will be the likely lessons from the roughly year-long setback the economy will have suffered when sentiment and the growth momentum begin to recover again. This is necessary in order to have a sense of what the strengths and weaknesses will be to take on the new growth challenge.
For this we can begin with a look at what were the strengths and weaknesses with which the economy and its corporate engine entered the historic five-year (2003-08) 9 per cent growth phase. In terms of industries, software, pharmaceuticals, biotechnology and automotive components were clearly the most globally competitive parts of Indian business. India’s global A team was made up of the leading firms in these sectors plus globally competitive individual firms from sectors which were not above the benchmark in their entirety. The obvious candidates in this league were firms like Tata Steel, Reliance Industries (petroleum refining), Larsen & Toubro and BHEL.
The growth years stand out for two reasons. One is the alacrity with which corporate India was seized first with hubris and then visited by shades of nemesis. The boom years were marked by extensive global acquisitions by the most aggressive among Indian players, with what now is very clearly high leveraging. The national mood was akin to that of Japan in the late eighties when its major conglomerates went on a global buying spree, facilitated by the domestic land and stock price bubbles. The Indian shopping spree was funded not so much by domestic as global easy money. Now those debts are coming home to roost, raising questions as to what really are the long-term competitive advantages of the best Indian firms.
The boom years also threw up some new winners and losers. Some of the winners are in the services sector and the most prominent among them would be Bharti in wireless services and the best performing new generation private sector banks like HDFC Bank and Axis Bank. These firms, whose costs and productivities are benchmarked against the best in their class globally, did not need to look beyond the domestic market because of the overwhelming growth opportunity that existed there. Another sector which has a potential to emerge as a global player is commercial air travel and, within it, a leading firm like Jet Airways. When the global economy and with it commercial air travel starts picking up again and is eventually opened up with the demise of bilaterals, it is easy to see leading Indian airlines growing inorganically. But even then the best Indian banks will not go on a buying spree abroad because the opportunity in India will remain mindboggling.
The high growth years have also thrown up a clear winner in manufacturing — automobile assembly. India will be the place where more and more cars will be assembled and, what is more, the latest compact fuel-efficient cars that have hogged the limelight at recent motor shows are mostly cars designed with emerging markets like India in mind and likely to be assembled in India for both domestic and global markets. Any number of car and auto components plants are likely to be shipped to India. What is not very clear is the role of Indian firms in this scenario. It is easy to see that Maruti Suzuki will rise and rise but one Nano will not make a summer for Tata Motors, and Mahindra and Mahindra will have to shift focus from SUVs to the broader car market.
The boom years have thrown up losers too, the most prominent among them pharmaceuticals and biotechnology. At the turn of the last decade both held great promise, in Indian eyes at least, as future owners of new molecules but while their discovery efforts are yet to bear fruit, their margins have been severely under pressure because of their reliance entirely on generics. The symbol of dashed hopes in this space is Ranbaxy, as much because its promoters proved unequal to continuing the good fight as the indignity that it brought upon everybody through its troubles with the US regulator.
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Perhaps the biggest change that will confront Indian business in the next decade will be the realisation that the battle field and action will be mostly in India. To be internationally competitive you will not have to be very good at exports, you will have to do a good job of minding your home turf, not so much from imports as from foreign players who have dug roots in India. IBM, for example, will pose a serious challenge to Indian software leaders in India, a challenge which the latter have till now lost by default because of their outward orientation. The clear apprehension today is whether IT leaders will go the pharma way, not in a year or two but maybe in ten, by becoming undifferentiated generics players.
The big opportunity and challenge will be in India because it will emerge as one of the world’s key markets. As more and more Indians escape poverty, the opportunity at the bottom of the pyramid, in fact among all except those in the top 20 per cent income bracket, will be phenomenal. Innovating to capture a part of this space will be the key challenge for Indian business when the growth rate picks up again in 2010 and consumer confidence returns across the board.