The last few weeks have brought a spate of seemingly bad news on the economic front. First, Tata Consultancy services announced a reduction in the incentive payout to its employees and followed it up publicly by letting a few hundred go. Then the high-profile IPOs of Wockhardt Hospitals and Emaar MGF bombed, coming as a rude shock immediately after the frenzied subscription to the Future Capital and Reliance Power issues. Reliance Power then created another history of sorts -- at least for the Reliance group -- by closing after the first two days at a heavy discount to the offer price.
The stock indices are now touching lows not seen in the last six months. Industrial production growth has slipped to 7.6 per cent in December 2007 compared with 13.4 per cent in December 2006. The GDP growth rate for 2008 is itself likely to slide to 8.5 per cent or so, from the heady 9.6 per cent of the previous fiscal, and probably to 7.5 per cent in the coming year. At the same time, inflation seems to be stoking up again.
How bad really is this 'bad' news? In my view, these developments may well be encouraging ones for India and the Indian economy. Many of us in India have been carried away with unbridled euphoria in the recent years. A complex alignment of local and international circumstances gave the Indian economy a much-needed thrust in the last few years notwithstanding abysmal political governance and the nearly paralysed economic reform process.
In this euphoria, greed has been slowly overtaking rationalism or pragmatism, and the creation of easy money and unheard-of wealth (at least on paper) have led to complacence among many who are now more focused on "unlocking" value rather than 'creating' it through the very first principles -- strategic and business process innovation, and a very efficient execution.
More attention has been focused in recent times on how many Indians have made it to the Forbes list of billionaires and if some of them are now the richest or nearly the richest in the world rather than on how many Indian businesses are on the list of the world's best in their sector. Feeding on this greed, merchant bankers of various hues started to get mandates by promising the moon to the gullible promoters, and at some stage in the recent past, business fundamentals were given a quiet burial when it came to valuing current or proposed businesses.
The IT sector, while to be lauded for creating a $50 billion sector for India and providing opportunities to millions for higher-quality jobs and earning respect and global recognition for India, has also been guilty of sparking the untenable wage inflation in the white- collar sector. Bolstered with stratospheric stock prices and a weakening Indian rupee for more than a decade, it continued to feed its growth by enticing hundreds of thousands of engineers and management graduates with high salaries and promise of further wealth creation through stock options. Other sectors had no choice but to match.
Lastly, the government has done just about nothing in recent years to make the country more structurally competitive by addressing issues relating to education, labour, transparent allocation of natural resources whether land or minerals or even the spectrum, foreign direct investment in sectors such as insurance, retail, aviation, and education, and reduction in bureaucratic red tape and corruption at large.
In this context, this correction in expectations at large may be a welcome one -- akin to an individual going for a health check-up and discovering the potential for onset of more serious problems if the discipline of diet and lifestyle change is not enforced.
There is every reason to remain very optimistic on the future of India -- both economically as well as socially. There are many, many things in its favour that can allow sustained, all-round economic growth for decades to come. However, stricter discipline has to be enforced when creating/managing the economic and business life.
To start with, the runaway inflation in some important components of a balance sheet has to be restored. Salaries and wages, especially for the white-collar managerial jobs including the entry level ones, have to be linked more stringently to business outcomes and direct contribution rather than just the perception of market trends. Commercial real estate prices have to come down to more realistic levels.
Promoter/entrepreneurs have to focus more on creating real value in the business through sustained product and business processes innovation, and higher quality of management -- the market will then automatically reward such businesses handsomely. The value-creation horizon itself has to be seen in the longer term of years and decades rather than in months.
The government, in its last year before facing elections, must take the required bold steps including some reduction in corporate tax rates and interest rates to give some stimulus to the business sentiment, while also ushering in the much-delayed reforms -- it has nothing to lose by doing so, and probably something to gain. The results may take some time to show but they will, and keep India growing strongly for decades to come, creating real value for many.
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