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Cover Story
 
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B&E WEALTH CREATORS
Keeping numbers steady in an year of extremes
Indian CEOs need to Artfully Manage Global & Domestic uncertainty to come up Trumps in 2012
Issue Date - 02/02/2012
 
Whether you choose to believe in a prophecy on our survival that is many centuries old, or a prediction on economic outlook that released just yesterday, 2012 doesn’t seem to be a particularly exciting year to look forward to. With the ongoing debacle in the Eurozone and the sombre forecasts for emerging economies, businesses seem to be headed for another bout of increased unpredictability this year.

So welcome to the Chinese Year of the Dragon; it will most probably be on us by the time this issue reaches you (January 23, 2012 to be precise). It’s a special sign on all counts, as the dragon is the only mythical creature in the Chinese zodiac, and is considered the most powerful sign of all; it stands for leadership, dominance, passion & ambition. And while the year of the dragon is auspicious and eagerly awaited, some Chinese astrology experts caution that it is an year that could see extremes – which could be either way. Well, we aren’t really into astrology of any lineage, but the chain of events leading to 2012 does promise interesting times for economies, businesses and markets.

The general prognosis is that the world in 2012 is heading for another economic winter even before it could see some really bright sunny days post the Lehman debacle. The sovereign debt crisis that gripped the EU last year started with Greece and spread like a malignant tumour. The €130 billion proposed Greece bailout by IMF, EU and European Central Bank is still stuck. Meanwhile S&P has downgraded France along with eight other EU sovereigns in its update recently. Now only Germany and Slovenia have a stable long term rating, with the all the rest being negative; making it harder for these economies to raise capital. The agency concludes that the measures taken by EU policy makers are insufficient to overcome ‘systemic stresses’ – “tightening credit conditions, an increase in risk premiums for a widening group of Eurozone issuers, a simultaneous attempt to delever by governments and households, weakening economic growth prospects and an open and prolonged dispute among European policymakers over the proper approach to address challenges”. The US, on the other hand, hasn’t recovered too well from the 2008 recession yet, and the toughest part about last year has been the unemployment rates (8.3% in January as per Gallup). In addition, while the US economy grew by 1.7% last year as per UN DESA (United Nations Department of Economic & Social Affairs) estimates, it faces the same deleveraging risk that Europe does. As the UN report suggests, US does have room for fiscal stimulus as government bonds are at record lows, but considering that the country nearly defaulted on its debt last year when the Republicans staunchly opposed the raising of the federal public debt ceiling, fiscal easing may not happen to the extent anticipated. The government debt-GDP ratio is still close to 100%. Professors Kenneth Rogoff and Carmen Reinhart had concluded from their study of high debt level economies that when debt levels cross 90% of GDP, median growth rates fall by 1% and average growth rates fall even further. US, unfortunately is a prime candidate, and a possible worsening of the EU situation could be the proverbial last straw...

 
The impact of a severe downturn in US and EU will automatically be felt in terms of a fall in external demand for emerging economies. Besides, a number of emerging economies faced macroeconomic challenges early last year linked to high global commodity prices and inflation, and resorted to monetary tightening, which has put the brakes on growth. That’s the major difference in these economies today when compared to their situation in the post-Lehman period. At that time, these economies were seeing a very optimistic phase of growth. But in 2012, they are expected to grow by 5.6% compared to a high of 7.5% in 2010 (UN DESA). India, unfortunately, is a perfect test case in this regard, where RBI hiked interest rates thirteen times since March 2010 before it decided to leave them unchanged in December last year. Now, businesses are expecting a return to growth oriented policies and a monetary easing, but that is expected to take a while. More importantly, businesses have gone on record to state that the policy paralysis from the government has been a major contributor to the slowdown that India witnesses today. Moody’s estimates India’s GDP growth to be slipping below 7% this year. Volatile IIP numbers, which declined by 4.7% in October 2011, tell a sordid tale (even as they rebounded by 5.1% in November 2011). More than anything else, including a relaxation of rates by RBI, businesses globally and in India are looking for a genuine reform intent from the government, but the upcoming state elections this year may make the possibility of that quite remote. Moreover, the fiscal deficit situation (5.6% as opposed to the 4.4% target) means that the Indian government has much less room for fiscal stimulus compared to 2008. Says Dr. Arun Singh, Senior Economist, Dun & Bradstreet, “The government’s balance sheet is already tight owing to the rising subsidy bill (particularly oil) and lower revenue generation. The situation is compounded by the rising current account deficit as well, which gives it much lower fiscal headroom.” The rupee depreciation compounds problems further. Interestingly, the 2012 A.T. Kearney FDI Confidence Index ranked India second only to China as 37% of investors surveyed indicated that their outlook on India had improved in comparison to 2010 (actually a general mandate in favour of emerging markets). But if policy measures still fail to live up to expectations, it would stay as potential on paper.

In this bleak environment, concerns on India Inc’s performance this year are obviously on the rise, and so are the deliberations in corporate boardrooms on the right set of strategies that can take them through the ‘cycles’ for the dragon year. But while what works and what doesn’t can only be most accurately stated in hindsight, we do have some benefit of precedents. The companies that managed the Lehman aftermath well and stood out with their performance do provide valuable lessons that CEOs must be aware of if they wish to enter the Year of the Snake on a high.

To that end, the B&E’s Wealth Creators list this year ranks India’s top 100 companies (from the BSE 500) based on shareholder wealth creation (absolute mcap growth) and employment generation (net employee additions as per last reported data) from 2008 to 2011. Their success owes itself to a variety of internal & external factors, but some vital case studies of outperformers can be highlighted here.

          

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