This year Davos was all doom and gloom. But as I walked around I understood what Gramsci had called the power of cultural hegemony. The Anglo Saxon world is in deep crisis and its media is the most influential in the world. The BBC, CNN, The Economist, Financial Times, and The Wall Street Journal together largely influence global opinion. Their current reality is very dire, the most severe since 1933, and thus all news commentators are very dire in their prognosis. But for many Asian countries, 1996 and 1997 may have been worse. As we interpret what happens to us it would be best to wear an Indian lens. Not much that I read does that.
In India, the crisis has not originated in the financial sector. Much of our banking and insurance sector is state-owned. It does not have any meaningful international exposure due to capital controls and had been restrained in its financing of real estate and the capital markets. Only the NBFC sector and the mutual funds were hit and the NBFCs more because of the regulatory imposed asset liability mismatch in their balance sheets. While 2009 will see an increase in NPAs and lower investment profits for insurers, India will witness nothing of the chaos that is unfolding in the West. The rapid reversal, late last year, of FII flows required to meet redemption pressures abroad led first to a liquidity crisis followed by a credit crisis in India.
Since then, policy action has created abundant liquidity but credit remains short for reasons I described in my column last month. If we analyse the Indian situation by sector, one can understand the pain in exports (auto components, textiles, and gem & jewellery sectors), we can also see the contraction in margins in commodities (steel, cement, etc.) with postponement in future capacity expansions and more modest growth this year. Credit constraints have, unfortunately, put pressure on commercial vehicles, cars, large consumer durables and a broad set of SMEs. Likewise, real estate, organised retail and aviation are also suffering, but this is due more because of the hubris in their business models than anything else. Taken together, about 40 per cent of the economy is facing pain of varying intensity. But sectors like telecom, FMCG and pharmaceuticals are growing as strongly as last year. The demand side equation with the monsoon, agricultural loan waiver, and sixth Pay Commission is well. The 273 million people in agriculture have not been hurt. Of the 150 million people working in services, only those working in real estate will feel the pain, till price cuts resume sales. In manufacturing, the 32 million workers in textiles and the 14 million in auto face real pain, but overall, India is not faced with the meltdown of elsewhere. As my friend Vinayak Chatterjee keeps highlighting, infrastructure needs much better implementation monitoring but this is independent of the crisis. So, thankfully, India does not need to assume the doom and gloom of Davos as its own.
In such a scenario, it is vital for every company in India to review its individual position and evaluate how it is affected. Companies should run scenarios to recession-proof themselves. In the affected sectors, it might require some brutal actions but not everywhere. Thereafter, the crisis could be viewed as an opportunity to develop a more proactive, forward-looking view of potential outcomes, and to define individual company aspirations for the downturn: attack or defend? The rules of the game could be changed to their advantage to not only survive but also thrive. Chief executives should take time to understand their competition both in India and abroad from an acquisition perspective. They should evaluate whether there are opportunities for them to take actions to dominate their industry globally. Presciently, the Buddha had said: ?I do not believe in a fate that falls on men however they act, but I do believe in a fate that falls on them unless they act.? Leaders, remember that the Buddha was Indian!
The author is managing director, The Boston Consulting Group. These are his personal views