CEO Speak

Chairman of BCG India, Janmejaya Sinha on economic slowdown

Chairman of BCG India, Janmejaya Sinha believes the structural vs cyclical argument is “rubbish”, and says that each company has considerable power over its individual destiny

Published 4 years ago on Jan 16, 2020 5 minutes Read

Based on your years of experience across industries and regions, what should companies do in a slowdown?

Every company should study its own performance rather than analysing the market. This will help the company understand if the pain is because of overall stress in the market or because of shortcoming in its own product or service, or if the competitor is doing something different. Don’t be conditioned by the past, get better information. The worst thing is to either be complacent or blind.

Is there a framework to deal with a slowdown?

Typically, in a slowdown, demand falls. When that happens, there are four key aspects to look at.

First, manage cash. Assess the liquidity position because payments will be delayed and receivables will pile-up. That will directly impact your cash flow. But if you give a discount to your longest-serving customer in your core business, treat that as an investment.

Second, cut fat and not muscle. Great companies cut fat and weak companies shed muscle. Look at where the investment is going — what can be delayed and what can’t. For example, if a company is executing multiple IT projects, it can assess what’s of paramount importance and prioritise them. Similarly, assess where the organisation can shed flab gathered over a period of time. Look at divesting non-core assets. If you are an EPC company, don’t take on a low-cost project that could tie you up for a long time. It will end up putting pressure on the company to generate cash flows.

Third, look at increasing your market share. Watch out for that overleveraged competitor who is in greater pain than you and keep an eye on the category of customers it is catering to. Then, make an all-out attack to grab your rival’s market share. Don’t lose sight of the long term and invest in what is critical to your growth. In a downturn, M&As tend to be cheaper. If there is a strategic M&A opportunity, pursue it, so that when the upturn comes, you will be in a winning position.

Fourth, manage communication well. Because the narrative being sent out is very important, especially to investors and analysts who are influenced by noise and not necessarily by signals. When the communication is clear, valuation distortion in the public market can be avoided. Rising valuation for your company means a higher bargaining power during an M&A.

Is the current slowdown more structural than cyclical…

That’s rubbish. I don’t buy this argument about structural vs cyclical. What is structural? What is cyclical? Can somebody explain that to me? These terms are used when we don’t know what we are talking about.

…but the current explanation is that growing Metro network and ride-sharing are stemming demand for cars.

The question here is ‘do you want to believe them?’ Yes, we understand that government policies have resulted in a change in the auto industry. The move to carry higher axle load has increased the existing capacity of trucks by 30%, which has resulted in excess capacity in the CV industry. Then there’s the migration to BS-VI regime. To describe them as structural is more of a catchphrase.

Whenever we say things like “oh, my god, there is so much traffic and people are using public transportation”, can anyone explain why the Metro capacity in Delhi is falling? They have reduced the frequency to the airport to one in 15 or 20 minutes. 

Companies that are going to fail will agree to that kind of ‘sharing economy’ narrative. The reality today is, there are specific situations impacting specific sectors. When two-wheelers and FMCG sales aren’t moving, not every player is feeling the pinch. There are some whose sales continue to grow. So, a company is an individual unit in a market place, and it needs to know where it stands.

So, what according to you has triggered the slowdown?

It is an outcome of the stress in the financial system, which happened in the 12th five-year plan, when the government wanted to build infrastructure through the public-private partnership model. Banks lent money for projects that got delayed for various reasons including land and environment clearances. As the projects got stuck, equity got eroded and public sector (PSU) banks were left holding the can.

The financial sector’s failure impacted infra and construction sectors, which are large sources of informal employment. Secondly, when there’s a financial crisis, micro, small and medium enterprises (MSMEs) suffer the most as their receivables increase — large players don’t pay them in time and banks don’t want to deal with them. A lot of people believe 55% of our labour is deployed in agriculture but that’s not for the whole year. They are also part-time workers in the city. So, when MSME and construction collapse, these workers have to go back to their rural homes and live off the land. Hence, aggregate consumption demand comes down. The central bank is largely responsible for the mess.

Why do you say that?

As bad loans built up, the RBI’s aggressive supervisory actions to clean up bank balance sheets showed that it neither understood the genesis of the current crisis nor the role PSU banks had played in funding the government. Supervisory actions were not supported by monetary policy and inflation had become the singular target of RBI policy.

What’s the solution then?

The financial sector is an artery that has clogged up and it needs an angioplasty. How do you unclog it? Reduce government ownership of banks from 51% to 26%; remove needless interference — the paralysing fear of vigilance and providing freedom to recruit. Similarly, old private banks should be asked to transform or be acquired by large NBFCs or larger banks.