2016 was a year of extremes as business sentiment swung from optimism to pessimism as the year drew to a close. The unexpected demonetisation put India Inc in a pincer as the cash crunch throttled businesses and threw growth projections out of the window. Against such a backdrop, Outlook Business invited an eclectic mix of experts comprising a banker, a consultant and chief financial officers from diverse sectors for its inaugural roundtable series, Outlook Business Brunch, 2017, in Mumbai. Editor, N Mahalakshmi, moderated the roundtable and this is the deliberation that followed.
Outlook Business (OB): Has the effect of demonetisation been fully discounted?
Sanjay Bahl, group CFO, Raymond: I think if you look at the impact of demonetisation, there were three shocks: one was demand shock. Cash going out of the system led to a contraction in demand, especially on the consumer discretionary side. Second, the uncertainty about what the government will do next and, third, the overall impact on productivity as businesses, on the whole, have seen growth decelerating and that was evident in GDP growth as well. Though there is revival in certain urban pockets, interiors, smaller business channels and wholesale trade will take time to adjust as new models of doing business emerge.
OB: Kaizad, as a banker, do you see a deeper impact or is the pain just a matter of couple of quarters?
Kaizad Bharucha, ED, HDFC Bank: On the basis of the interactions we’ve had across industries and customers, I think things have started looking up from the first fortnight of January. What it also shows is the inherent resilience of the Indian business community. Even in rural parts, people have found ways to keep commerce going; not just in mandis but also on the transport side. So, we are effectively seeing a sharp pullback in the current quarter.
OB: Bobby, is that the sense you get as well?
Bobby Parikh, founder, BMR Advisors: I certainly don’t believe that we’ve put this behind us. In November and December, businesses have come off by 50 to 70% and, if at all, they are now probably at the same level year-on-year. This means that there has been no growth from December of last year to December this year and, as per your business plan, you would have wanted at least 15%-20% growth. So, how much of the growth one will be able to recover in the next financial year is something that time will tell.
OB: Ramesh, do you agree with that?
Ramesh Swaminathan, CFO, Lupin: I am looking at the landscape in four different buckets: private consumption, government expenditure, capital formation and exports. Private consumption and government expenditure have been chugging along, but exports and capital formation have been pretty poor. Exports have seen a pretty low growth rate, while capital formation has been negative for the past three quarters. And if that’s going to continue for long, it’s certainly not a good omen. Then, of course, the structural change caused by GST will add to its own challenges as we expect trade to destock. The other important aspect to note is the contraction in credit growth itself, which it at its lowest since 1958. So, I expect the slowdown to continue for at least two to three quarters.
OB: Kaizad, is Ramesh portraying too bleak a picture?
Bharucha: I agree private consumption has been held up because capital formation and capital expenditure had slowed down and now that’s got further disrupted because of demonetisation. But I think, as I said earlier, the information that I have by speaking to pharmaceutical, paints, and FMCG companies does reveal that business is coming back in a significant manner. On the point of credit growth, one has to add to that number another 2-3% because the traditional means of borrowing has found an alternative in the form of commercial paper and NCDs as the cost of funds out there is cheaper than the loan market. So, over the past couple of years issuances have gone up quite sharply. I do believe that with certain amount of stimulus, both for corporate and for individuals, coupled with enhanced government spending, could provide impetus to growth. As far as exports are concerned, growth has been a bit of a challenge, but it’s not fallen off.
Swaminathan: I take the point on credit growth but the other factor is that companies are looking at de-levering in a big way. And that’s a good thing in itself, but it hasn’t taken off in a big way. It has its own problems because of issues with securitisation and lack of a strong debt market. But nonetheless, a slowing credit growth is cause for worry.
OB: Rohitash, what are the worries on the export front?
Rohitash Gupta, CFO, eClerx: Demonetisation does not have any impact on the IT sector, but it’s the other D which impacts us the most and that is digital. Automation is the big theme, it is much more than your legacy way of doing business which was primarily people based or contract based. In the future, algorithms, solutions, outcomes will matter more than what you’re selling on the supply side in terms of people. So, on the exports front, especially in the services business, there will be a huge churn and who knows how policies of various consuming countries such as the US and the UK will change. So the challenge is that one has to quickly adjust the business model from the legacy way of doing work to meeting newer demands that client industries are creating.
OB: If you were to rate companies on the level of preparedness for this change [automation], where would Indian companies rank?
Gupta: In terms of adoption of automation, Indian companies are way behind. For example, take banking as a sector, all large global banks be it in Europe or the US, are quickly ramping up robotics and machine learning initiatives. With the new digital wave, everyone is trying to either adapt or adopt some kind of digital principles or automation or artificial intelligence, even at the backend, to improve their efficiency. But Indian companies, whether it’s in retail or banking or any other sector, are clearly behind the curve.
OB: Ramesh, are business challenges bigger for pharma exporters?
Swaminathan: There are three big challenges: First is the concern in the US over rising drug prices. Generic pharma is actually about affordable medicine but the fact that there have been investigations on possible cartelisation is a cause for concern. The other worry is the noise over manufacturing in America, which will actually work against the US because the paradigm of low cost manufacturing in India works very well not only for us but also for the consuming public in America. But if nationalistic fervour gains ground, there’s going to be a lot of negative development. Second is, how new product introductions will pan out and, third, of course is the action of the FDA against lot of Indian companies. Back home, we have also this populist exercise by the government of expanding the list of medicines whose prices are controlled which, I feel, will work against the interest of the industry.
OB: Sanjay, will domestic consumption continue to be a bright spot?
Bahl: The long-term benefit that we clearly see is that with GST coming in, the share of organised trade is definitely going to increase. Today, 75% of the branded apparel market is unorganised, so with GST coming in and with the shift towards digital and formal banking channels, the trade and business models will change. The differential taxation disadvantage that the organised branded business had vis-à-vis unorganised trade will narrow down. In jewellery, for example, the unorganised trade has folded up to a large extent with the shift towards branded jewellery. We see that happening across the fabric and apparel businesses as well. So, that’s a clear source of optimism in the way businesses get structured.
Swaminathan: The other beneficial fallout would be a wider tax base as generating black money is going to be that much more difficult. That could be a long-term benefit.
OB: But to enjoy the long-term benefits of GST, does one need to live through a painful transition?
Parikh: It’s still a good thing to have and the sooner we do it, the better it is. Having said that, the design of GST has been significantly compromised from the time it was conceived. So, from being one tax which applies to goods and to services at a uniform rate, all taxes are fungible. There’s no standard taxes, there’s no taxes getting incorporated into costs. It’s unfortunate that after so much effort we will come out with something which is highly complicated and not as efficient as it should have been. But it will still, hopefully, be an improvement over what we have today. For instance, there are certain ways in which businesses have grown. Logistics, warehousing, and the supply chain were all designed keeping taxation in mind. In a GST regime, companies won’t have to work with a fragmented ecosystem. But changes will happen over a period of time. Just because the GST switch is turned on doesn’t mean Raymond can redesign its supply chain or redesign its distribution overnight. We don’t have that much of a lead time for GST. Everyone is waiting for things to happen but before you know it, the regime will be in force.
OB: Sanjay, are you investing for growth?
Bahl: We have enough capacity so that is really not the focus area right now. But we are investing in brands, products, innovation and investing in markets as we see a huge opportunity in the shift from the unorganised to organised, and we would like to make the most of the shift.
This is the first of a two-part series. You can read part two here.
