How India Inc should brace for great global uncertainty

What can India Inc do to weather global storms of inflation, Russia-Ukraine crisis etc?

A trip to the airport will tell you how we have all bid adieu to masks and the Covid-19 pandemic, and are ready to board the India flight to Rs 5 trillion. However, it seems as though we’ve hit turbulence too soon into our flight - Russia-Ukraine conflict, an energy crisis, nosediving rupee and a looming global recession. While the weather reports seemed to be clear at the start of this year, recent October forecasts from both the World Bank and the International Monetary Fund suggest a slowing of Indian economic growth. So, what can India Inc do to weather this global storm?

Firstly, we must continue to make capital expenditure (capex) investments. It goes without saying that to turn India into the ‘promised land’, we must place long term bets on our infrastructure, capabilities and people. I lay special emphasis on the word “continue”, because thankfully the wheels of the capex cycle are already spinning. After all, revival from the pandemic was aided by strong public investment programmes in infrastructure and manufacturing which have been followed by private capital.

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Healthier balance sheets, improved consumer sentiments, more demand visibility and production linked incentive schemes have caused a surge in capex this fiscal, and more is expected to come in the next fiscal. Research shows that the estimated total capex (public and private) from FY22 to FY24 amounts to approximately Rs 10 lakh crore, the highest in any three-year stretch so far. A common theme in the September-quarter corporate earnings season has been the commitment to carry out capex in the next 2 years - despite muted profitability and inflationary pressures. Whether expanding current manufacturing capacity or entering hot new areas altogether (eg - components for electric vehicles, hydrogen, semiconductors, or 5G), large Indian corporates are pushing the pedals of the capex cycle, and must continue to do so, with small and medium-sized companies joining them as well.

Second, if the pandemic has taught us one thing, it is that we must strengthen our own supply chains. Here I lay emphasis on the word “own”. Our warcry since 2020 has been China-plus-one, as we try to position ourselves as an alternative manufacturing destination adjacent to China. But what about our own domestic manufacturing industries that are, despite our best efforts, still dependent on China for inputs? Our auto-component industry for example saw a 35% year-on-year increase in component imports from China in FY22, despite the ‘Aatmanirbhar’ push. It’s the same story with active pharmaceutical ingredients (APIs) in the pharma industry and many other industries. Why? Even though our policy initiatives are in the right direction, this problem cannot be solved overnight. It will be years before our domestic supply chains can match China’s prowess, something which it has been working on since the 1980s. In the meantime India Inc must continue investing in building local sourcing. In the short term, in light of the imminent economic slowdown, companies can stress test their supply chains, do business continuity planning, build buffer stocks, diversify their suppliers and take a very tech-oriented, data-first approach to make their supply chains agile and cost-efficient.

Also read | Centre says falling commodity prices to ease inflationary pressures

Third, India Inc needs to be steadier with its growth plans. We must focus on driving sustainable revenue growth, so that we can absorb macroeconomic shocks without resorting to adverse measures such as layoffs. Driven by investor pressures and desires to secure round- after-round of funding, our focus seems to be on hyperscaling revenues by hiring organically and inorganically (through acquisitions). Inevitably, when a recession looms, all the employees have to be jettisoned to save the ship - and this is not only done by Indian unicorns and startups, but is also currently being done by established big tech players on the other side of the globe. One has to remember that layoffs come at a huge cost, not only economic (in terms of lost hiring and training costs) but also huge reputational cost to the brand. When scaling businesses, we all talk about “path to profitability”, but perhaps we need to rethink and explore “growth from profitability” and correct unit-level economics much earlier in the growth journey, before businesses become too big to steer away from icebergs.

Having said that, I do see a silver lining in the midst of these turbulent storm clouds. In past recessions also India has enjoyed a relative cushion from global volatility shocks, owing to our decoupled position from the global economy - which still holds true in today’s context. What’s more is that in a divided world, our smart neutral geo-political posturing has kept options open for us. With a strong domestic market and sound economic fundamentals, this recession may just be a brief bumpy patch in our soaring flight.

(The author is the chairman of PwC India)