S&P HAS raised questions over India's economy, which is hit by high government borrowing, rising imports and political compulsions that have stalled reforms in key areas
An ETIG analysis shows that the share of employee cost in total revenue for BSE -500 companies dipped from abou t 8.4% in FY'11 to 7.8% in FY'12; the lowest since FY'08
Times have changed. 2012 is not 1991. The political as well as business environment has undergone a paradigm shift. In the last two decades, India’s economic landscape has changed permanently. Comparing the present economic malaise with that of 1991 may be exaggerated but nevertheless an important reflection. Foreign exchange reserves were less than USD 1 billion in June 1991, adequate to cover two weeks of import, compared with USD 290 billion today, adequate to cover a period of seven months. Average GDP growth rate in 1991-92 (at 1999-2000 prices) was 1.3% compared with the average of the last five years at 7.95%. The economic infrastructure is far more diversified, domestic savings rate - which impacts investment-gearing ratio at current prices - improved from about 20 percent of GDP to 31.6 percent last year and FDI inflows, which were a modest USD 500 million then, have touched USD 42 billion. Nevertheless, a comparison with 1991 is not totally out of context. Notwithstanding the inherent strengths there are significant vulnerabilities that prompt such comparisons. Besides the Euro zone crisis and America’s tentative recovery; the free fall of Indian currency, declining industrial production coupled with high retail inflation is only adding to the woes. The recent release of GDP growth rate for 2011-12 at 6.5% (and a nine year low of Q4 growth rate at 5.3%) has indeed served as the final nail in the coffin.
The obvious question that strikes one’s mind is whether Indian leaders are prepared to take on the challenges or would they prefer to remain in denial mode. Will India Inc. only whimper and whine, or will it take the lead and reinforce its strategy and investment in people to turn this uncertainty into opportunity? As they say, ‘the proof of the pudding is in the eating’ so it is with leadership – both business and political – the real test of leadership is how they react in times of crisis. With negative news doing the rounds, it is the opportune time for India Inc. to rise up the challenge and turn the tide in their favor.
The economy’s ratings…
Further to downgrading India’s credit outlook to negative in April 2012, Standard & Poor’s June 8, 2012 report titled, “Will India Be The First BRIC Fallen Angel?” raised fresh questions over India’s economy, which is hit by high government borrowing, rising imports and political compulsions that have stalled reforms in key areas. The report blamed a “divided leadership at the Centre” as one of the biggest hurdles for ushering in economic reforms to spur growth and boost investments. It further goes on to state that the combination of a weakening political context for further reform, along with economic deceleration, raises the risk that the government may take modest steps backward, away from economic liberalization in the event of unexpected economic shocks. S&P is not alone, yet another global financial services firm Moody’s says that Indian economy is facing stagflation – where growth is slow and inflation high. The GDP growth and consumer price inflation (CPI) indicators apparently justify Moody’s analysis. Ruchir Sharma, the head of emerging equities at Morgan Stanley Investment Management and author of recently released book “Breakout Nations” believes that the superlative growth rates achieved by India between 2003 and 2008 (above 8%) was an extremely short-term phenomenon driven by a huge gush of global liquidity, and that it was never really government, or economic policies, or anything else that India did to lift its growth rate. Further, yet another rating agency Fitch as downgraded India’s credit rating for similar reasons.
The question is as to whether we are seeing a short-run blip, or a new downward trend? While rating agencies and analysts see that there are clear sign of deepening slowdown, the government seems to be under the garb of a recluse and prefers being in a denial mode while stating that the rating agencies are following a ‘herd mentality.’ This somehow lends a feeling that the economy is unprepared for a crisis. The earlier they wake up, the better.
What do business leaders feel?
A growing list of corporate leaders have been expressing anguish over lack of policy initiatives by the government; including IT major Wipro’s Chairman Azim Premji, Infosys Emeritus Chairman N. R. Narayana Murthy, top banker Deepak Parekh and Aditya Birla Group’s Kumar Mangalam Birla. Premji has been quoted as saying, “We are working without a leader as a country” and that “if we do not change, we would be down for years.”
However, there are corporate leaders such as ICICI Bank Chairman K. V. Kamath and CEO & MD Chanda Kochhar who believe that over the medium to long term there will be robust and sustained economic growth. S. Y. Siddiqui, Chief Operating Officer, Maruti Suzuki India, explains, “It is true that the growth enablers are moving south; but from a medium to long term perspective the fundamentals of the economy remain robust and we have no doubts in that. If we put the enablers in the right perspective, our GDP growth rate can definitely go to 8%. In the long-run, there is nothing to worry.”
As far as India Inc. is concerned, in this time of economic uncertainty, the pressure to control costs is at a peak. Media reports corroborate to the fact that a few companies have bypassed the annual appraisal while there are reports of MNCs cutting jobs across the board – which to some extent will also hurt the Indian subsidiaries. Indian companies are focusing on trimming staff costs to weather the impact of an economic slowdown and to maintain competiveness in the face of a slide in investments, policy logjam and rising input and interest costs. An ETIG analysis shows that the share of employee cost in total revenue for BSE-500 companies dipped from about 8.4% in FY’11 to 7.8% in FY’12. This, in fact, is the lowest employee cost-to-sales ratio of BSE 500 companies since FY’08, suggesting a rather cautious approach being adopted by companies in controlling staff costs.
Perhaps sensing the future and its complexities, IT major Infosys besides temporarily freezing salaries for its 1.5 lakh employees and cutting variable pay is delaying on-boarding of some of its planned 28,000 new recruits until mid-2103. Further, the IT industry – the largest employer of skilled workforce in the country – is putting off hiring people with experience. The reasons for this could vary from a huge bench to lack of new orders, to the troubles in the Euro zone, to the accentuated anti-outsourcing sentiment in the US owing to Presidential elections.
Analysts are of the opinion that having learnt its lessons from the 2008 fiasco, companies are being cautious but not panicking. Companies realize that talent needs to be retained and further invested in if they want business success and continuity. Neelam Dhawan, Managing Director, HP India, shares, “The management should invest in HR programs that are fundamental to the organization – job rotation, career development and succession management – opportunities which arise especially in times of uncertainty.” Sreekanth K. Arimanithaya, VP & Chief of Human Resources, Britannia Industries, feels that the tough environment is a big talent development opportunity. He shares, “we are on a growth trajectory and recognize the importance of ‘people and capability’ in fuelling growth. We will, therefore, invest in building and sharpening our people and capability, through training, experiential learning and excellence in execution.”
The leader’s role
An uncertain economy is bound to shake up the business environment and challenge the status quo of leaders and their leadership style. It is an opportunity for leaders to re-look at their options and re-prioritize. While they need to leverage their core competencies, at the same time, they need to formulate new strategies, create viable business models and lead internal transformations for sustainable growth and profitability. Adaptability and agility are the hallmarks of successful leaders across the globe when it comes to responding to crisis time. The following are a few traits that distinguish a leader who have it in them to take on crisis head on and emerge successful.
Be honest and communicate
Employees are as much aware of the economic realities and are naturally worried. Before rumor mongers get into action, it is important for the leadership to articulate with clarity and consistency the business realities, external environment, competition et al along the counter strategy and action plan that they have in place. Agrees Neelam, as she says, “At the time of uncertainty, it is paramount that the management be open and honest about the prevailing conditions and the measures being taken to address them. It is equally important to create a climate where employees feel they are part of a broader vision of the organization and that their contributions matter.” An effective communication helps decode the downtrend, the causation variables and the likely recovery variables. According to Sreekanth, “Communication with rationale and data can help organizations to increase employees trust.”
Motivate and instill confidence
Employee fear and worry usually accompany a crisis and this invariably takes a toll on employee morale with adverse impact on productivity, turnover and motivation. The challenge of holding on to great teams and keeping them motivated does not go away when the economy is in for a slowdown. While it is true that the immediate risk of people quitting certainly declines, leaders must recognize the fact that employees could also become demoralized and less productive, and jump ship when the economy improves. Thus, in times of crisis, increasing employee trust and confidence should be the primary focus for leaders. HP’s Neelam explains, “Leaders in tough times are expected to make prudent financial and organizational decisions, communicate effectively with the customers and employees, and instill confidence in their leadership teams. They need to understand that it is in these times that their actions are watched more closely and intently than ever before.”
Believe in people, build capability
Perhaps nothing can be more counterproductive in times of crisis than a short-term approach on the company’s people strategy. Siddiqui, shares, “The people strategy should always be looked at from the medium to long term perspective. Hence knee-jerk reactions on people-related decisions should never be taken.” In fact, crises are the best times to focus on building critical capability models for success. However, having said this, hiring needs to be judicious, thoughtful and should be focused on bringing on board the right fit for today and tomorrow. If at all workforce reductions are a must then the blueprint for the same must be planned carefully. Leaders need to see that they trim the fat and not the muscle implying that organizations need to use performance management processes to identify the underperformers and make corrective action to address poor performance. At the same time the organizations must reward the top performers and not alter the incentive programs in haste.
Progressive leaders realize that in a tough and challenging business times, people are the organization’s core strength; they will define and deliver the blueprint to recovery, success and sustained growth - for the record, this is the guiding philosophy at Maruti. Crisis time is no excuse for rightsizing or downsizing. Even if laying-off is the only option left, then it must be perceived to be fair and transparent. An effective communication will make employees appreciate the ground realities and be more willing to accept harsh decisions in the interest of the organization. “The best leadership is the one which is patient and not ‘reactive’, mature, positive and capable of effective communication and people connect in such a situation,” opines Siddiqui.
Invest in people
Even in tough economic conditions, the opportunity to develop talent must not be let go off. Conserving costs should not imply reducing spending on training and talent management initiatives. However given the constraints, leaders must look at optimally using the budgets. So as to strengthen employee engagement and ensure that people have the required skills they need to lead through uncertainty, the focus must be on investing in training and development initiatives. V. R. Ferose, Managing Director, SAP Labs India, share his thoughts, “A meaningful employee engagement initiative is to make it as independent as possible of the external environment. Employee engagement has to become a part of an organization’s culture.” As a viable option, efforts should be made to involve more in-house faculty as compared to external trainer and on-site programs instead of outbound ones. This will certainly ensure that the basic importance of training and development is not lost sight of while at the same time budgets are in control.
Don’t let crisis go waste
The real test for leaders is how they react in a tough situation. During the good times, it’s easier to be a leader and be successful; as the market forces them to tide the wave. However, it is when the leaders need to sail against the tide, the real leaders emerge. A crisis presents unique opportunities too, and leaders must see to it that the crisis phase does not go waste. It is herein that they must look inwards and focus on their core competencies and discover opportunities for recovery and growth. Vinita Bali, Managing Director, Britannia Industries, says, “External vulnerability provides opportunities and threats, and leaders must understand both; prepare the organization and people to overcome threats and convert opportunities into business results and growth.”
The Last Word
A crisis is a litmus test for leaders and their inherent leadership qualities. To prepare themselves to abate the downside, leaders are renewing their focus on their own areas of competence. Leaders in India Inc. concur that neither knee-jerk reactions nor decision fatigue are answers to the prevailing economic scenario. They are being honest and transparent about the prevailing conditions and are communicating clearly with their people on the measures taken to address them. While a microscopic eye on the financial decision making is critical, they have not shied away from the telescopic view of the long-term vision. Leaders believe that when conditions are tough and challenging, it is people who define and deliver the blueprint for business continuity and sustainability – reasons enough why they to continue investing in people.