Thought for
the day
“In a world where every event is identical to a previous
event no change would ever occur.”
Peter L. Bernstein (American, 1919-2009)
Word of the
day
Pokelogan
(n)
Marshy or stagnant water that has branched off from a stream or lake.
Marshy or stagnant water that has branched off from a stream or lake.
(Source: Dictionary.com)
Shri Nārada Uvāca
Is it healthy for democratic traditions to presume a
“demand for debate” as “opposition”?
Investment strategy - II
As the world endeavors to slither out of the fiscal crisis, a
new global economic order takes shape and India’s socio-economic transition to
a truly federal governance structure that is transparent, accountable gets
established over next decade or so, Indian businesses will face numerous
challenges.
Historically, a large majority of Indian businesses have
grown on government patronage and/or resource arbitrage opportunities and have
been low on innovation, productivity and scale. The politically advantageous
socialistic façade of the government, especially during 1950-1990 led to
misallocation of resources, trade and capital controls, demand suppression, and
protectionism that promoted low productivity. The conditions have changed in
past 10-15years but not sufficiently to make a majority of Indian businesses
globally competitive.
The following trends, which are quite likely to strengthen
in next few years, would suggest that a large number of small, over protected,
less productive, uncompetitive, under-capitalized businesses should become
extinct in next decade or so.
In past two decades we have seen this happening with small
steel and cement plants, textile manufacturers, petrochemical plants, numerous
public sector undertakings, NBFCs, etc. There is no reason why it should not
happen to (a) small and mid-sized engineering and construction companies which
purely survive on administrative patronage: (b) ITeS providers who are pure
commodity plays solely focused on wage arbitrage opportunities; (c) mid-sized
commodity producers who cannot scale up to compete with global corporations in
a more open, price & quality competitive and transparent market; (d)
intermediaries who are not adequately capitalized and technologically prepared
to serve or compete with large global businesses which are highly price
sensitive.
1.
The cost structure of Indian businesses shall
move up structurally due to higher wage inflation, rise in effective tax rates,
higher compliance (social, legal, environmental) cost, higher cost of capital
and rise in cost of resources like land, minerals, water etc.
2.
Given the non-linear rise in consumption demand,
the investment demand shall rise faster, in a period when global cost of
capital would have bottomed out and begin to rise. India has clearly missed the
advantage which China enjoyed by investing and building huge capacities in an
era of lower interest rates. This shall force us to be governed by the terms
set by the capital providers, essentially opening our markets to global
competition. What we saw in case of FDI in retail might just be a small trailer
of the things to come.
3.
The global competition and rising cost should
squeeze the margin and hence force the small and mid-sized businesses out of
arena.
In our view, there is little opportunity in India’s SME
segment at this juncture. Only the businesses which have shown the capability
to take the game in global arena look promising. Otherwise stick to the large
Indian MNCs – if one is looking at a really long-term horizon (5-10years).
Also read Investment Strategy - I
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