Monday, September 07, 2009

Indian Business in 2010

2010 is going to be an interesting year. It seems that the current recession was bad, but much less worse than what it could have been, or was expected to be. Growth is returning now to Euro area, as well as in the United States. A course correction has happened in China, and by boosting the domestic demand, China has returned to growth. Indian economy is growing too, and it seems that they have also escaped the worst effects of recession. Recession forced a spectacular political change in Japan, and it may alter the course of politics in many East European nations, but otherwise, we may all emerge from this by middle 2010.

This is not to say that the party can begin any time soon. This recession caused many imbalances, which has to be corrected. The government has expanded its role in haste, and there is no clear plan underpinning it. Rather, the governments across the world intervened hoping, like a bad venture capitalist, that an exit strategy will arise. It is unlikely to happen. Besides, the huge liquidity that the treasuries unleashed, which is still being used to build up bank balance sheets and not so much to be given out as credit to businesses, will sooner or later reach the consumer and investment markets and spur demand. This will possibly happen sooner than supply expands sufficiently, resulting in huge inflation in most of the Western economies.

The remedy that the central bankers have planned so far is based on cutting back on extra liquidity with a combination of measures. The problem is that no one knows when to start all this. The bigger problem indeed is that anyone is unlikely to EVER know what will be a best time, given the interconnected nature of the global economy and the fact that we are possibly in the middle of great structural shift. This makes an inflationary run on Western economies almost a certainty. This will worsen the government finances drastically, and they have to cut back many public services and expose their people to hardships they have not seen in many generations, leading to political upheaval in many European countries.

I could have proclaimed that this will be India's moment, but I shall stop short of it at this time. Rather, it is possibly more appropriate to make a more qualified statement - that it will be an enormous opportunity for Indian companies if we can address our structural imbalances quickly. The Indian economy has enormous domestic demand, which should act as a balancing factor all the time, but the Indian government is already huge and deeply indebted, which limits its ability to raise money and attract investments. If, however, the government can go through some of the long-planned reform programmes, which, it is already showing, the current administration is committed to, it will cut the government debt and make Indian Rupee an attractive currency. This needs to be coupled with a clampdown on corruption and even greater transparency in all dealings, and India will indeed become a very attractive place to invest in. And, soon, we shall see investments coming in not in our stock markets - that bubble has now burst and will remain burst for a while - but in our real, value and job creating, businesses.

Apart from attracting foreign investment, though, this should mean an world of opportunity for Indian businesses, provided they are up for it. I put that qualifier as taking these opportunities will essentially mean shredding the old mindsets and gearing up with a new perspective.

Let me explain. For example, it seems, everything going as expected, Indian rupee will start appreciating by early 2010, going back to its pre-recession levels of Rs.40/$1 before the end of next financial year. One can see that it can go even further, if the Indian government can indeed push through its reform agenda, cut government debt and yet push through its infrastructure upgrade programme through public/private partnership, solve its power problems through upgrade and expansion of nuclear energy production capability, earn a little peace dividend through expanded engagement with China [and not give in to rhetoric on both sides] and gain further leverage through the current free trade initiatives with ASEAN countries. I am conscious that this is a rather long wish list, but all of them plausible and currently in the works. With that scenario, it is not unlikely that the Indian rupee can go up to Rs. 32/$1 by early 2011.

Now, this will obviously be tough for those who sold Indian products and services on the basis of costs alone. The appreciating rupee will make Indian products and services dearer, though this will possibly be dampened somewhat by labour market weaknesses in India, where employment is unlikely to expand back to the pre-2008 levels quite soon. Besides, India will also benefit from returning workers, who will come back from the Gulf regions, Europe and United States, for a variety of reasons: job cuts, more difficult immigration rules and increased chauvinism in these societies. This will add to India's skills inventory, keep the costs down and service levels higher.

However, coming back to the key point, the changed realities will mean that the Indian businesses have to upgrade themselves, almost across the board, from low cost providers to higher end, high skill providers. In that sense, the recession and the oncoming inflation without growth troubles in Western economies may actually present an opportunity for Indian businesses. The optimistic scenario looks like the Japanese companies gaining their bridgeheads in the 1970s. [That is, of course, dependent upon avoiding another, rather grim, scenario, where the world spirals into a great war like 1930s, with a resurgent China trying to earn its rightful place].

I think the picture I paint above is indeed plausible, though it makes a number of assumptions about how the government will behave. However, I think the challenge lies elsewhere: The ability of Indian businesses to adopt a new, premium category vision than the government pulling the strings. India, in this brave new world, will have significant advantages over China, because of its trained managerial manpower, who knows how to take on an emerging opportunity without the government support. Of course, for India, to realize this vision, peace with China remains key, and this is where the government must play a big role. But, otherwise, it indeed seems that India's moment have arrived.

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