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October 3, 2012

Friday the 14th

by manojchughit

Finally, the Big Bang did happen. And what a date to pick! What timing, with the government announcement being made less than a week before Ganesh Chaturthi, the Hindu festival that marks the day Lord Ganesha bestows his presence on earth. Lord Ganesha is the “ remover of all obstacles” and all events and happenings begin by chanting his name. The benefactor obliged and the roadblocks began to be removed and dismantled.

Ganesha Chaturthi

So, what did the government of India actually do a little more than two weeks ago? To start, it made a few bold moves to address key issues relating to fiscal deficit and restarted the reform process. To me, this is just the beginning and a lot more will follow, contrary to popular belief.

India’s fiscal deficit could touch 6.1% of GDP this year. This is a dangerously high level, which would clearly influence India’s ability to invest in high growth areas and the social sector. Government subsidies have been a key culprit for this huge deficit. The government, rightly, took on the issue of fuel subsidy head on, by reducing subsidy on diesel  (a politically sensitive subject) in addition to putting a cap on subsidized cooking gas cylinders(LPG)) made available to households. It did, in the process put itself at grave political risk, but thankfully survived. No ally or opposition likes “freebies” to be taken away or reduced. Thankfully, all is well!

India’s subsidy is a huge 3.5% of GDP and is marked with rampant leakages with the intended segments not getting their dues. More targeted subsidies and “rightsizing” of the subsidy package is critical to India’s long term success. We will talk more about this in future posts.

Apart from reducing subsidies, to spur foreign investment and send a positive signal to the global community, the government announced a more liberal regime for multi-brand retail, by allowing foreigners to hold 51% equity. It also increased limits for foreign direct investment in aviation and broadcasting.

Opening the multi-brand retail sector to foreigners has been a political land mine, with the government arguing that this would improve supply chains from the farm to fork, whilst giving opportunities to farmers to get more for their produce. Farming techniques would also get modernized because of the intellectual capital that global players would bring. Of course the naysayers have been running a high-pitched attack campaign, which has now proven to be unsuccessful. To rake in more moolah, the government also announced a plan to disinvest in specific state-owned entities, providing an opportunity to balance the budget a bit better.

The much-anticipated move of lowering interest rates, however, did not occur, but the Reserve Bank (Central Bank) injected more liquidity in the system by reducing the amount of money the banks need to park with it. A high-inflation rate of 8% has deterred the Reserve Bank from taking a more large-hearted approach.

Well, two weeks on, what are the results? You’ll agree that two weeks is not a long period of time to make a pronouncement and certainly not in India, but the initial results have been overwhelmingly positive. Foreign institutional investors have started returning to India, bringing more than US $3B in the period. The stock markets have given a big thumbs up, with the index rising more than 700 points and the Rupee has gained more than 270 basis points, bringing back some lost respectability. Government officials are euphoric and are forecasting the Rupee to grow stronger at Rs.50 to the dollar from approximately Rs 52-53 that it now holds. This will help reduce India’s current account deficit.

In my last post, Whither India, I urged you to remain positive about this country and take a long-term view. Most recently, I validated my hypothesis of patience with a number of leaders of US businesses in India across different industry segments.

Their own experience and lessons are summed up here:

  • A leading consumer goods beverage company committed investments of more than $2B in India more than 10 years before they saw results. Today, India is one of their most profitable emerging markets. Convincing the board was not easy, but today the results are there to see.
  • A player in the financial services industry viewed huge opportunity in the financial transactions market where 97% of the transactions occur in cash. They continue to be bullish about India.
  • Creating and building the right ecosystem, through strong local partnerships which could help provide the “oxygen” and market access was critical. This aspect was initially overlooked by some players.
  • Most US companies are leveraging the talent pool of India to help drive innovation, create new products for global markets or provide more efficient shared services at lower cost, thereby helping corporations meet Street’s expectations. India’s vast pool of educated manpower continues to offer exciting opportunities.
  • Most corporations found India to be extremely hard to begin with, but have learnt to make money once they have gained the right experience
  • Many companies have worked a balance of trade equation with key partners in India. They have created a dashboard that captures the business that both partners have to affect for each other and set a governance mechanism.
  • Making a few “big bets” is key and this approach helped several players

Despite the ups, downs and at times, reversals in policy followed by the ensuing frustration and agony with policymakers and their ilk, one fact cannot be overlooked and forgotten– India has 700 million people living in rural areas. They need to be clothed, fed, washed, housed, educated and kept healthy.

Who says there is no pot of gold at the end of the rainbow?

To learn more about guest blogger Manjoj Chugh, please read his bio and stay tuned for more posts.

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