Indian Economy - Future prospects

Indian Economy – Future Prospects – 31^st July 2014

R.Kannan – Hinduja Group

Write Up in the Global Economic Summit Held on 11- 13 , September - Mumbai

India’s potential for economic growth is between 7 – 8% in the immediate future and 8% - 9% in the medium term.  It should be possible to achieve a growth of 7% within one year from now and it could be taken above 8% in the next three years. In the long term we could aim for a growth of 9% p.a  going forward for at least ten years.

Indian Economy is in the take off stage again. After achieving a growth of more than 8% for a few years, the growth decelerated on account of developments in the global economy and the domestic issues. After  a reasonable growth, the kind of deceleration of growth was not expected. Due to increased social activism and the issues relating to coalition management at the central government level, led to impasse in decision making and many of the sectors which were attractive for doing business became unattractive during the last three years. After a successful working of Coalition model for several years, the model failed to sustain the momentum going forward. The objectives of various coalition partners were in conflict with each other and the working arrangement failed in delivering the desired results.

After several years, a government with a majority has come to power at the centre and  the government  will not be required to  waste its time on management of coalition and coalition issues and it would be able to concentrate on issues relating to  Social , Economy , Technology development and other pressing issues. The issues relating to Global Economic Melt down are also being addressed and the global economic environment is improving but not at a pace which is desired by the global leaders. India with other fast growing countries in the world can contribute to the overall increase in global economic growth in the coming years.

The experience of the Prime Minister in achieving a good growth in Gujarat in Industrial and Agricultural development is likely to go a big way in replicating this model in several other parts of India. The policies announced by the government are forward looking and they had set an objective to increase the rank on doing business and the World Bank President was of the opinion that in the immediate future, India could move  up fifty ranks from the present level, if appropriate response is developed by the government to kick start the economic growth again. The sentiments of investors  including the  foreign investors are also very favourable  today in kick starting the investment process in the Indian Economy.

Indian Economy is inherently very strong and the Economic growth is well supported by all the segments of the economy including the development in rural areas. After the increased penetration of mobile phones in rural areas, the services business in rural areas has started gaining momentum. India has the largest number of entrepreneurs in the world and there are lot of small entrepreneurs and traders in the unorganised sectors which help to sustain the economic momentum.

To attain the full potential of Economic growth , proactive policies have to be formulated and implemented in various areas of the Economy.

Agriculture. India is one of the largest producers of agricultural produce in the world and it is ranked Number one and two in many products. Agriculture is also contributing to exports in a big way. The productivity in agriculture in many of the commodities are less than half of the best in the world and there is a lot of scope for improving the agricultural productivity. The government is targeting a growth of 4% in Agriculture per annum and if we  consider the present productivity levels, we could look at a stretch target of 8% growth in Agriculture and 6% under normal circumstances. Even achieving a growth of 4% p.a. was found to be difficult and there were shortfalls in achieving the target in many years. Few of the states in India, had shown that  it was possible to achieve a growth of 8% in agriculture . This growth could be achieved by creating cooperative structures for agricultural produce in all the states, ensuring remunerative price for farmers without any government subsidy and consolidation of land holdings for adoption of automation ( under cooperative structure ) and adopting the best practices . This could be achieved through creating new organisation structures for agricultural management, contract farming, remunerative price to farmers, knowledge sharing and extensive training.  By adopting these strategies, we can also ensure that the year on year sharp decline in Agriculture’s share in the overall GDP could be arrested.

Industrial Policy. The government has already prepared plans for increasing the contribution of manufacturing from 15% of GDP to 25% of GDP. The government has  allowed 100% FDI in Many sectors of the economy and there is an increased liberalisation in limits being effected in various sectors of the economy, year on year by the government. Recently the FDI caps in Defence and Insurance were increased and many more such announcements are expected to be made in  the near future.

One of the reasons for high growth in any sector or industry world over is  ensuring the development of a viable  Eco system for an industry and  availability of inputs ( Land, Labour, Capital and Machinery ) at affordable and low cost rates. The government’s initiative in developing  specific industry focussed industrial clusters will ensure the development of a suitable eco system. But for a secular growth for the industry, there is a need to ensure other factors of production are also available at competitive rates.  The government is already trying to address the issues of Land and Labour. The government had announced a  few policies relating to labour, which should provide flexibility to corporates, optimum utilisation of labour. The government is in process of formulating policies to acquire land at competitive rates for industrial and Infrastructure development.  There is already an enabling environment for adoption of best technologies from across the world in various sectors of the economy. The IT hardware sector is being given a boost to grow in line with the growth in IT services sector, There is a need to reduce the cost of capital for the investors and also make sure long term funds are available for high capital intensive projects.

The mechanism created in the Cabinet secretariat to speed up large projects through Project Monitoring group has started yielding results. Many of the pending projects were cleared by this group and companies have started taking initiatives to speed up the implementation of the cleared projects. Similar mechanism is being contemplated to be set up in various state levels to speech up projects which have capex of less than Rs.1000 cr. There is an enabling environment now to revive the plans for capital projects and capital expenditure. The new push should goad companies to plan for new large projects for expansion of capacity.

Fiscal Policy. India is reporting fiscal deficit every year and this trend is likely to continue for several years to come. India has got one of the lowest Tax / GDP ratios in the world. Considering the increasing contribution of services to the Indian Economic growth , more and more services are being brought under the service tax net. In this budget, it is projected that the revenue from service tax will exceed the collections from Customs duties and Excise duties. The subsidies given by government is one of the major issues of concern and it was showing a rising trend. The revenue earned by government falls short of the collections on Revenue account and the deficit has to be met by raising resources on capital account. The fiscal deficit was showing a rising trend and drastic measures had to be taken to reduce the fiscal deficit. Now that  the deficit is coming under control , the expectations are that this could be improved further. In the immediate future, the objective is to  maintain the present credit rating of India. The new government is planning to undertake measures to improve this rating.  Improvement of country rating will help Indian companies to raise foreign funds at attractive rates. Since our rating is low today, Indian companies have to pay premium on the funds borrowed from abroad.

To shore up the revenues and exercise control on expense, the government has to ensure improved compliance of the tax  policies, targeting the subsidies and substantially reducing them; generate resources from under performing / non performing assets of the government including shares in PSU’s and land holding of the government. There is a need to manage the fiscal deficit by exploring  all the available options and one major criterion could be considered , i.e., how the options being considered would affect the performance of the Industry and Economy. Before deciding on options, including the change in tax policies and incentives, the socio economic benefits of the new planned policies should be reviewed.

In the light of new developments across the world, now countries are adopting Macro prudential policies, whereby the policies implemented by government are in synch with the policies implemented by central banks and there is a focus on systemic risk. There is an increased focus on Inflation, Unemployment , Economic and Industrial growth. In this light, the Fiscal policies being formulated should take care of the interest of all the stake holder’s in the economy.

Monetary policy. The recent crisis in the world has increased the role of Central banks in ensuring the stability of an economy and the financial services systems. Central banks around the world had played a major role in bringing in the required stability to financial systems and taken the role of close monitoring of economic variables to develop appropriate response. The banks have adopted easy monetary policies, ensured liquidity in the system and brought in appropriate responses from time to time . The central banks focus on key monetary variables and one of their main focus is inflation targeting. Indian Central bank has played a pioneering role in weathering the global economic storm and brought in policies which ensured the stability of the financial system in India. Going forward, the monetary policies should ensure easy availability of credit for good projects at affordable rates . The monetary policy has to take care of economic growth, employment levels and inflation. There is a need to increase the availability of credit to good projects and reduce the interest rates.

Trade Policy. India  has a large deficit today and this is likely to increase considering the fact that the reliance on imported energy is likely to increase going forward. One of the recent initiatives taken by the government is to encourage exports from India to various other countries in the world. Now the Indian embassies based abroad are helping Indian companies to  identify the opportunities for exports. Over the years, India also has become globally competitive in many sectors. India today has emerged as the Global Hub for IT/ITES, Auto and Auto components, Pharma and Bio tech, R& D services and in several others areas. There is a good eco system available in the above sectors to achieve globally competitive standards by Indian companies. Going forward, the government has to draw up a list of countries with whom India runs a trade deficit and prepare action plans for reducing the deficit with the countries, where the deficit is very high. The emerging industries, the emerging entrepreneurs and SME’s should be encouraged to look at the export opportunities and we have to identify few more areas for development including Health, Education , Defence production and others. Achieving higher growth in Manufacturing and Agriculture would help the country to increase the global  competitiveness in many more products. By increasing the global competitiveness, it should be possible to reduce the trade deficit, which is one of the main concerns for Economic stability.

Trade policy of India today enables the foreign companies to invest though  FDI in many sectors of the economy. But the FDI received every year by India is still miniscule compared to the FDI received by other countries in the World . There is an increased interest by investors around the world to invest in Indian manufacturing and the government is in the process of making investments in India easier and there will be new announcements regarding Trade facilitation. The requirement of large funds for infrastructure including the plan to develop 100 smart cities is already attracting the interest of investors around the world. The recent budget allowing infrastructure and investment trusts and allowing  banks to issue infrastructure bonds will attract more foreign investments.

Implementation of Policies. In many sectors of the Indian economy, there are policies which encourage the growth and development. There are issues regarding how they are being implemented. The investors find issues, during project implementation stage. The government has identified , this as one of the major areas of focus and attention is being given to simplifying the procedures in project approval and implementation stage.

Future of the Indian Economy is really good. There is a confidence prevailing among both domestic and international investors on the Indian Economy today and these sentiments have to be converted into investments going forward. Considering the interest from investors from all over the world, Indian Economy is poised to realise its growth potential and the Stake holders from various parts of the economy have to  play a constructive role in realising the full potential.

Role of India and China in the Global Economy

Role of India and China in the Global Economy

By R.Kannan

International Conference on Asia - 14^th March 2014

The Asia’s role in Global Economic Development is becoming significant after the recent economic and banking crisis in the world. The global crisis had an impact on the economic performance of all the economies in the world but the countries from Asia were still able to report growth rates which were higher than the growth rates reported in other parts of the world. Asia contributes to more than 50% of incremental economic growth in the world.

Within Asia, India and China continue to have a major contribution to the economic growth. The sheer size of the population of both countries and the continued demand for products and services in two countries continue to sustain the economic growth today and this will be the trend in future.

India and China were playing a major role in the Global Economy before the rise of UK. After the dominance of UK, USA Started playing a major role in the global economic development. After the World War II, Japan was growing very fast and then we saw the rise of countries from ASEAN. From 1980 onwards, the economic growth in China started gaining momentum and the country is still able to sustain the high growth today. From 2001, we heard the concept of BRIC and terms like VISTA, CIVET, MENA and MINT and how they can contribute to the global growth.

India and China are in the process of regaining their prominence in the world and China is already leading the world in terms of Forex reserves with a forex reserves of more than 3.8 trillion dollars. The road to regaining the competitiveness is strewn with both opportunities and risks. To achieve the potential today, both countries have to carefully calibrate their movements in the Economic, Political, Social, Cultural, Technological, Security and Environmental aspects.

India and China have to work very closely in all these areas to realise the full potential of Asia.

Economy. Indian Economy after reporting a good growth for few years saw the rate of growth decline due to both internal and external factors. The potential for growth is still at 8% and the solutions are available to achieve  8% growth. What is required is the consensus building among the various stake holders in adoption of the policies for achieving the growth. The sectors like manufacturing and agriculture have to be given more importance, going forward. The proposed Industrial corridor projects in India will provide a momentum to the growth and there is an increased interest from various countries in the world to participate in these projects and FDI is likely to come through this route to support these projects. It should be possible to increase the contribution of industry to country’s GDP to 25% from the present level of 15% by increasing the alliances with countries like Japan, US, China, UK, etc in the world.

There were concerns regarding the fiscal deficit and current account deficit and it has been proven in the recent past that by adopting innovative policies it should be possible to bring down the deficit. India is inherently strong due to its large informal sector which was one of the main reasons for India weathering the storm during the crisis. This sector can play a major role in sustaining the growth rate and creating employment opportunities in the Indian Economy.

India has been recognized today as an IT Hub, Pharma Hub, R&D Hub, Automotive Hub, Diamond and Jewellery Hub, Leather Hub and global companies in these areas have increased their interest in India and new units are being set up in these areas. Global sourcing companies also have established their offices in India other than China. These sectors in India will continue to do well  going forward. 

China’s continued Economic growth has helped to gain the global leadership role today and the country has trade balance with many of the countries in the world.  The focus on creating large industries with government and bank financing support enabled Chinese companies to emerge as the largest companies in the world in the sectors , they operate today. So far the economic growth was driven by the strategy of exports as well as inflow of FDI . After the recent crisis and reduced demand for exports, there was a need for rebalancing the economy. The need to focus on creating internal demand had become paramount. In the recent past, there were also concerns about the rising inflation and interest rates.

China has to continue the engagement with other counties in the world and apart from focussing on exports , there is also a need to look at reducing the trade balance with other countries in the world. If Yuan , continues to rise, it will erode the competitiveness of exports. The Yuan level could be maintained only by reducing the trade balance with other countries. To ensure the continued availability of resources, the country already has acquired mines and industrial  production facilities  in many parts of the world. China is the largest foreign investor in US treasury bonds today and because of this reason, there is a need to ensure the stability and strength of the dollar. China’s efforts to make Yuan as one of the major currencies for trading will take shape in a few years and Dollar will continue to have its dominance for many more years to come.

China’s economic growth was mainly driven by focus on Industrial growth and it has emerged as the power house for manufacturing in the world today. Starting from a strategy of producing low cost goods , there is now a movement towards manufacturing of high quality , high value goods in the manufacturing sector. The country has to liberalise FDI and strengthen the Trade and Patent laws to ensure a benign environment for foreign investors. Going forward, there should be an increased focus on developing the domestic market and increasing the purchasing power of workers  in the country.

Society . India is a multicultural society and there is a lot of diversity in Customs, habits and Income levels. In the past few years, the society had gone through a big transformation and the consumers are able to exercise their choice for the products ,they prefer. The liberalisation of economy has created hyper competition in many industries. As per the latest classification, the Indian consumer is categorised into twelve income groups and there is a constant upward movement of people from one level to other level. There is a free movement of labour from one city to another city and there is a lot of internal migration whereby people from rural areas move to urban areas. The mobile technology revolution in the country has helped even Semi urban and rural areas to look at aspects relating to urbanisation and the government’s schemes on providing employment for minimum number of days work in rural areas have created employment opportunities for people. The services as a sector is  also developing well in rural areas . There is a movement away from Joint family system to nuclear family system. These trends create a huge demand for consumer products of various categories at different price points. This has attracted the attention of global marketers to India.

In China, the demand for high end products had seen a big rise in demand over the years. The purchasing power of people in urban areas has gone up significantly.  System of providing work  permits to workers to work in a city has restricted the movement of labour and depressed the wages in the manufacturing sector. Many of the workers at the lower level come to work from far away distances. But the recent trend in increase in wage levels, if it continues,  will create different income segments and create new class of customer segments for the products. This will also result in consumer boom, which would partly offset the reduced demand for products from exports. The government has taken measures to increase the population and now people are allowed to have more than one child in a family.

The trends witnessed above , will help to create new products for the local markets , which could be exported at a later stage. 

Political and Security issues. India being the largest democracy in the world, the decisions at the government level have to be  taken after taking the consensus of various stake holders in the Economy. There are forces which act against the pro economic growth policies because of which the economic momentum slows down. The country has an approach to keep  very cordial relations with others and by itself does not take initiatives which challenges the sovereignty of other nations. India is part of various Economic Alliance forums in the world and considering its contribution , there is an effort to  obtain a permanent  seat in the UN Security Council .

The country helps the adjacent countries in aspects relating to technology and training aspects. In the last few years, there were lot of internal issues relating to terrorism in various pockets of the country which are creating concerns on maintaining a peaceful atmosphere. There is an increased interest from most of the countries in the world to partner with India in all the growth initiatives and there is a foreign business delegation  visiting India every week to identify business  opportunities for doing business. India has moved  ahead in various reforms including passing of RTI act and empowering the Panchayat Institutions in the country. In line with the increase in economic prosperity, the country has also increased the defence budget. Multilateral institutions are also supportive of India’s growth initiatives and after the recent geo political issues in the Asian region, Japan and US had shown increased interest in enhancing the tie up with India. India has joined the nuclear club now and this should help to increase the power generation from this source. China has emerged as the leading partner for India in trade and  runs a huge trade surplus with India today.

The present government in China will last for 10 years and they had already drawn a plan to maintain the economic growth of China. Since China has gained leading economic status in the world today  , in line with the economic status, it is trying to match the political status by increasing its influence on many countries in the world. In terms of  its growth ambitions, it is trying to achieve this by acquiring the natural resources from regions like Africa and has allowed its leading companies to take over the ailing MNC’s from the developed world. Its economic engagement with many countries are helping China to maintain the growth rate. Since its objective is to increase its political influence, it is facing opposition from the entrenched players in the world. The present form of merit based Government system is likely to continue in China which is good to maintain its economic growth. To gain political influence, China is also giving military aid to countries, low interest loans for equipment purchase from China and various other incentives to obtain political support. But the recent moves on Territorial disputes , have created concerns among US and neighbouring countries.

Going forward, both the countries should use the political dispensation to increase the economic engagement with other countries in Asia including Myanmar , Vietnam, Malaysia , Singapore, etc. The disputes with the neighbouring countries  should be brought to an end by announcing ceasefire .  Both countries in alliance with Japan should engage in consultation on the matters to be addressed relating to  multilateral institutions as well as developing the Asia as the Economic Hub of the world. The political influence over other countries should be exercised through increased economic engagement rather than seeking territorial advances. The recent past indicates that as countries grow in economic might, the number of wars saw a decline. Most of the time, the countries take a posture to threaten other countries without intention to go for a war. Instead of this strategy, the best to way to achieve the political influence is through adopting a strategy of win win and identify action plans for mutual cooperation. There should also be consultations on addressing the internal  terrorism issues and sharing the best practices between the countries in addressing this issue.

Technology. The recent developments in communication and mobile technologies had a significant impact on most of the economies and how the business is being done. Both India and China have benefited a lot from the mobile technologies and the social / financial inclusion  could be achieved through adopting more applications of these technologies.

In  other areas, there is still  lot of gap in availability of technologies which is being bridged through creating strategic alliances with the leading players in the world. The leading companies in the world from various sectors are already present in both countries and all of them want to increase their engagement.

India has been  successful in many of the space initiatives and is in the process of developing a robust domestic Defence manufacturing base. China is already advanced in the technologies relating to warfare and it is in the process of manufacturing its own Air craft for  commercial purposes.  Both countries  have their own home grown labour intensive technologies which are in  use across both the countries. There is an increased need felt for creating patents for the local products and systems are being  put in place to create more patents.

The low cost labour intensive  technologies in both countries could be transferred to countries where there is a strategy to promote SME’s.

Environmental issues. There is a pressure on both countries to reduce the pollution levels but on  per capita basis, the levels are still low. Considering the need for further economic growth and increased level of manufacturing , it would be impossible to meet the global standards in the immediate future. Few more years are required for China and India to move towards to the global standards. In the meanwhile, we have to build a consensus on the need for pursuing the manufacturing strategy and this could be done with the help of emerging  environment friendly technologies.

In the coming years, opportunities and Challenges are many for the countries from Asia. India and China are well poised to capitalise on these opportunities. India and China have  to co-operate in all the endeavours as partners in progress and the focus of partnership should be based on economic fundamentals and the influence of political considerations should become secondary, while realising the opportunities. India, China and Japan can take a joint leadership in realising the full potential of Asia’s Economic Growth  and let us hope Economic collaboration will take precedence over all other collaborations between these countries.

Thank you.

Sectoral Developments in Indian Economy

National Research Seminar on

Sectoral  Developments  and their Impact on Indian Economy

UGC / K.P.B. Hinduja College of Commerce / Kirti M.Doongusree College of  Arts,Science and Commerce

Speech by R.Kannan

22^nd February 2014

I would like to thank the organisers for inviting me and   I have great pleasure in participating in the National Conference on Indian Economy , sharing some thoughts on the future options available for achieving a high economic growth going forward.

The topic taken for the two national conference is very appropriate at this moment and  I am happy to note that the deliberations in the last two days covered all the important sectors in the economy and the various issues relating to these important sectors and how they impact the growth rate of the Indian Economy.  I learnt that lot of new perspectives had emerged from the deliberations so far which will be useful for the  economic policy making in India.

The recent economic performance in India caused many concerns among various stake holders and the general sentiments toward new investments and growth moved towards a moderation.  After holding steady  for two years after the Economic crisis, the growth in the Economy had shown signs of tapering and reached  its decade low of 4.9% . Inflation in the recent past had shown a secular rising trend and recently started receding.  The lower economic growth in India was due to developments in the Global economy as well as issues relating to Regulation, Environment , increased competition  between political parties , increased social / Judicial activism and sensational reporting by media. In 2008, the potential for economic growth was at 10%. The conditions for higher economic growth were very favourable including  ; low interest rates, robust capital markets, good corporate performance,  consensus on national issues between political parties . Due to recent developments and the fast rise in inflation, the potential for economic growth is moderated to 8% now and there is a big gap between potential and the actual performance.

By taking a concerted actions in collaboration with various stake holder groups in the economy, it should be possible to achieve 8% growth within a year. The solutions for accelerating the economic growth are in place and what is required is cooperation of various stake holder groups in achieving this target. In India , even today many of the sectors are growing at more than 10% p.a. But before the economic slow down, many more sectors in the economy were growing at more than 10%. By adopting and implementing sector wise action plans the desired growth could be achieved.

Finance Sector. This is the sector which acts as a catalyst  to stimulate the economic growth since all the segments of the economy depend on external source of funding to pursue the growth objectives. Banking and Capital markets play a major role in the development of an economy. In India the value of Capital markets and bank credit are comparable but the number of IPO’s had seen a decline. Bank finance continues to play a major role. The issue of NCD’s by corporates is  likely to rise and private equity capital is available for investments in several sectors. The pension sector had been opened to new players and growth in this sector will generate long term funds which could be deployed in the infrastructure sectors

The issue of new licenses for banking will result in higher growth and penetration of banking . Adopting of new technologies including the mobile phone based technologies  will help in meeting the objectives of financial inclusion. Through these technologies , the availability of credit  could be increased in the rural areas.

The share of FII’s in total market capitalisation of the companies is at a high level.  The behaviour of FII investors , despite their investment is only through secondary markets, determine the stock market and index performance. As and when FII’s increase the investments, the boom in stock markets is witnessed and when there is a significant withdrawal, the markets take a beating. Considering the growth potential of India and the  future capital requirements in the economy ,  continued flow of funds through this route would enable corporates to meet a part of their requirement through this source ( through divestments and sale of shares through secondary market). Hence it is necessary to keep the sentiments of this investor class favourable and action plans could be drawn up to  sustain  the interest of this investor class through favourable conditions for investment.

FDI. After the Economic Crisis, only a few markets in the world continue to show a healthy growth. Despite India’s growth decelerating , the growth achieved this financial year was still one of the highest economic growth  in the world. There is an increased interest  from investors from all over the world to be associated with Indian market. Japanese companies are very bullish on India especially after the stellar performance by companies like Maruti, Honda.  Most of the companies from Japan had drawn up plans to increase their presence in India. The companies from US, Europe and Korea  have also shown keen interest to increase the investments in India. Last week, China expressed the desire to take a share of  30% in future infrastructure investments . The opening up of computer hardware industry for manufacturing including chip manufacturing augurs well for increasing the foreign investments in India. The creation of Industrial corridors will see more foreign collaborations in India and in future,  the FDI  inflows are likely to show a good rise from the present levels.

While addressing the economic growth issues, the foreign exchange movements had become one of the main issues and the robust risk management had become very important.  The imported products had contributed to higher inflation levels due to exchange depreciation. In the recent past, many new initiatives were taken by government to control both fiscal and current account deficit and there is a relief in the short term. For the long term, solutions are available to ensure a good fiscal position for the country and by strengthening the financial position, it should be possible to keep the exchange rates at competitive levels . Since the oil imports are increasing , there is a need to keep the currency at the present levels.

The increased Inflation in India in the last few years was due to both demand and supply factors and the supply factors had a major influence on the way the inflation behaved. The latest reported level of inflation had shown a favourable trend and we have to ensure inflation remains within 5% levels going forward to keep the economy growing at 8% growth. The government has to continuously monitor the developments in the economy and develop appropriate responses from time to time to ensure the inflation remains at healthy levels.

    Agriculture sector in India continues to employ the maximum number of people in India today and year on year, the share of agriculture in our GDP is showing a declining trend. As per the predictions, in the next few years, agriculture will add the maximum number of employees among all the sectors in India, despite its Share in GDP will fall further , year on year basis.  The issues in agriculture include, the low productivity levels of crops compared to best in the world, the wastages at the farm / during transportation / storage , the reduced interest in Agriculture as a profession. Considering the recent developments, especially, the inflation fuelled by agri commodities at the retail level, this sector will become attractive and more corporate and individuals will look at this sector favourably to fulfil the growth ambitions. There is an immediate need to increase the crop productivity without losing much time . The reforms in distribution of agricultural commodities through amending the APMC act would help the farmers to obtain remunerative price for their produce and generate enough surplus to buy inputs at much higher prices ( without availing any subsidies )  and  invest in new technology to achieve the best productivity levels witnessed in other countries.

Services Sector. The loss of share of agriculture in GDP is taken by Services sector. Indian IT sector helped to create the India brand in the minds of investors from across the world and this sector continues to grow at a fast rate  , creating lot of employment opportunities. The prediction going forward for this sector is also very encouraging. This  sector’s contribution in GDP growth is very high , since value addition in this sector is one of the highest among all the sectors in the economy.  India has one of the  large education systems in the world producing large number of Engineers, Doctors and Graduates. Despite most of them are not job ready, the companies which recruit them give a good training. The government has drawn up a skill development plan with a target to train more than 500 mn by 2020 in various sectors / skills, where the demand supply gap is high and  likely to become higher. Government is taking steps to increase the enrolment ratio at higher education level and various action plans were in place to develop skilled personnel.

The future projections for media sector indicate that this sector would continue to grow at more than 10% and the technological developments in this sector will lead to many changes in the way we consume media offerings. The business models will undergo a major change. The health , tourism, aviation , banking and financial services will continue to grow at more than 10% going forward. The penetration of mobile communication in rural areas is going to change the customer preferences in rural areas and even in rural areas, the growth in services will be higher than the growth in other sectors. This sector will continue to support the higher economic growth going forward.

Manufacturing contribution to GDP is India is very low and the government has set a target to take this to 25% of GDP from the present level of 15%. This will happen through liberalisation of more sectors and entry of several MNC’s in India to set up their manufacturing operations. Achieving this target requires the basic condition of simplified procedures to do business and moving up the rank in ease of doing business.

To achieve higher economic growth, the continued investment in infrastructure is necessary.  Despite savings level is very high in India, not all savings is invested in financial assets . There is big demand supply gap in financing infrastructure and from the present resources available within India, it would not be possible to create an infrastructure which will support an economic growth of 8% p.a. There is a need to create new sources of funding and tap the foreign funds. Government has already created enabling conditions to attract funds and increased the limits of foreign investors to invest in various financial instruments. New instruments are being introduced to address this need. But in the last few years, the attractiveness of this sector reduced due to environmental concerns , profitability of projects and availability of funds. Apart from Traditional funding sources like multi lateral financial institutions and LOC, the scope for raising funds from Pension funds and  Sovereign Wealth funds is being explored. By increasing the investment in financial instruments from the domestic savings through innovative financial instruments, the required funds could be raised.

The present issues constraining our economic growth are short term. The solutions are available to achieve a higher growth. The starting point could be revival of mining in India through creating a mechanism to  sort out the issues which resulted in closing of many mines in India. Only through mining of Iron ore, Coal and other resources, the industrial growth could be revived. This has to be taken up on a priority basis and it is possible to bring solutions which is acceptable to all the stake holders.

Government procedures. Over the years, the procedures have become cumbersome, resulting in a huge delay in approval of projects. The creation of CCI at Centre and project monitoring group has helped to address the needs of projects having investments of above Rs.1000 cr. Similar system is being introduced in states to fast track projects. There is an immediate need to simplify the approval procedures and time bound targets for various procedures to be declared by government and they have to stick to this schedule for all the projects.

Capital  is one of the major inputs to doing business  and since the main source of funding in India today is bank funding, there is a need to reduce the interest rates.  This will help all segments including government, corporates and individuals and increase the purchasing power.

Land. After the recent high economic growth , the land has become scarce in both urban and rural areas. The cost has become prohibitive. There is a need to evolve policies, procedures by which land is made available for businesses at affordable rates.

Increased co-operation between all the stake holders. This is the need of the hour today. Part of the poor performance was due to increased activism by all the stake holders without realising the impact it has on the Economic Growth, Inflation, Interest rates and Unemployment. All the stake holders need to work towards the common target of 8% Economic growth.

Finally, it is very important for every sector to contribute to the economic growth of the nation. Despite , the potential for growth is different for different sectors, in India , there is still a huge gap between the potential and actual growth. Many more sectors in India can grow at more than 10% in the years to come. To achieve the desired growth, sector wise , policies and systems are to be introduced and implemented very effectively by the government and support of all the stake holders is necessary. Let us all strive towards achieving this growth potential through our initiatives and actions.

Thank you.

Business Excellence and Strategy

Speech delivered by R.Kannan

30^th January 2014 at National Stock Exchange

On the Business Excellence – Annual Day

I am very pleased to be here today and would like to thank you for inviting me to be part of this  Business Excellence day and annual celebrations.

We are living in a VUCA world, where things are vague, uncertain, Complex and Ambiguous and the challenge for organistions today is to bring predictability to the performance from operations. This has become a major concern for Governments and corporates after the  2008 financial and economic crisis. Every thing  done well within a company is not a clear recipe for success since the developments in the environment have a major impact on performance of companies. Developments in the environment including the hyper competition,  challenge the proven business models and companies have to be agile and nimble to address the emerging challenges with fast response.   The businesses which were very attractive five years back had become unattractive today. The viability of many of the business models is being tested in this uncertain world and new models of doing business are emerging and in a continuous, evolution mode. To address these challenges , it is necessary to build a business excellence frame work spanning the entire organsiation.

The organisations which emerge as leaders in their field have Visionary leadership,Customer focus, robust strategy, appropriate organisation structure, scientific allocation of financial resources, sound HR policies,excellent business systems and good corporate governance practices. The combination of above factors will go a long way in creating and preserving the competitiveness of organisations.

Jack Welch Says . “A strategy is something like, an innovative new product; globalization, taking your products around the world; be the low-cost producer. A strategy is something you can touch; you can motivate people with; be number one and number two in every business. You can energize people around the message.” GE is a great organisation which introduced the latest management principles on Strategy and competitiveness and these models are being adopted by corporates and management consultants in strategy formulation across the world. GE as a company went through many business cycles and witnessed many economic crises during its existence of more than hundred years and it  continues to perform very well even today. The company is a good example for large corporates to adopt the best practices in strategy formulation and implementation.

Strategy development will be at two levels, one at the corporate level and other at the business level. In a corporate level, the decisions regarding What business to enter, what business to grow, what business to maintain and what business to divest are taken.

In Business level Strategy, it is the strategy to be adopted within a business and Strategy is all about positioning an enterprise in the minds of the target customers. The battle of companies and the leadership happens in the minds of the customers. Companies can adopt Strategies like Cost leadership, Differentiation or combination of both to achieve a competitive position in an industry. The strategy adopted by NSE is integrated and combination strategy. In any industry , there will be companies adopting one of the above strategies and the companies creating competitiveness do different things from others or adopt different methods to do the same thing. The best strategy which provides the long term competitiveness of an enterprise is the one, which is able to offer quality products and services at affordable and reasonable costs. The companies adopting these strategies emerge as market leaders and achieve margins which are much higher than the rivals, which is evident from the experience in many industries.

Earlier companies adopted one of the above strategies, competing in a few product market segments. The emerging trend is that  companies are trying to compete in all price points and cater to different customer segments . Starting point of successful strategy is right positioning of the product which will attract the targeted customers.

Strategic management has two phases. The first phase in which the formulation of strategy takes place ; the Vision, Mission and Objectives and overall direction are decided. In the implementation phase, allocation of resources, adapting the organisation structure  / systems and procedures in line with the change in strategy , performance monitoring and implementing course correction are adopted. The methods like Balanced score card are being utilised by many organisations today in the strategy formulation and strategy implementation stage. The same process is being adopted to evaluate the performance of employees at all levels to decide the  incentives, bonuses and promotions.

For effective strategy implementation, adoption of business excellence model goes a long way in achieving the intended goals of an organisation. Business excellence is one of the main pillars of good strategy implementation. The difference between organisations which succeed and fail is mainly determined by how well the formulated strategy has been executed and seamless execution depends on the excellent practices adopted across the enterprise in organisations.

Perfection is what every visionary leader wants to achieve. According to Aristotle, “Perfection is not attainable, but if we chase perfection we can catch excellence.
Excellence is an art won by training and habituation. We do not act rightly because we have virtue or excellence, but we rather have those because we have acted rightly. We are what we repeatedly do. Excellence, then, is not an act but a habit.”

The companies use business excellence framework to attain and maintain competitiveness. Business excellence process by itself is not  strategy but a process by which effective strategy implementation takes place. The framework covers the entire organisation .

Unlike in Strategy formulation wherein only a few in the organisation are involved, the strategy implementation involves every one in the organisation. In this respect, the business excellence framework has to be a company wide exercise and covering all the employees. Each employee has a role to play in bringing out the best in the organisation. It is a combined effort.

It had been empirically proven that the organisations which adopt business excellence frame work report much better performance than those who do not adopt this frame work. According to a Mckinsey study, internal processes in an organisation leads to variation in performance to the extent of 50% compared to the peers.

One tool that can help organizations strengthen their management systems and processes holistically, is the internationally-benchmarked Business Excellence framework. It provides standards for managing people, innovation and service, which are key enablers of business excellence.

 The BE framework helps organisations to assess their performance, identify gaps, and take action for improvement. It encourages a systems-based approach to management, with the adoption of a robust measurement system, to assess and monitor performance. Measurement allows organisations to compare and benchmark their performance against the best-in-class in their industry.

Employees play a key role in an organisation’s journey towards higher productivity and business excellence. The business excellence journey of every company is anchored by its employees. It is, therefore, important to align employees’ aspirations and efforts with the organisation’s goals.

Your branding of this effort, ACE ( Attitude, Customer and Excellence  is very apt.) The business excellence initiative should start with a positive and favourable attitude from every employee. An effective implementation of identified strategies depends on the favourable attitude from all the employees. Every employee in the organisation has to understand the Vision , Mission and overall objectives of an organisation and align his /her personal objectives with the organisational objectives. Their activities should be channelised towards excellence in whatever they do. The attitude towards company’s vision,mission, objectives, colleagues and customers should be in alignment with the overall organisational efforts in achieving the overall objectives of an organisation.

Customers decide the future of an organisation . It is essential that companies understand the customer expectations well and develop products and services which meet their needs. Today customer awareness is very high and customers expect a fair deal from the companies and they support companies which are very fair to the customers delivering the expected value for the price paid.

In my career I had an opportunity to work in companies where new business excellence initiatives were undertaken. Especially after the  liberalisation the competition in industries increased and the need for developing formal strategic plans and excellent business processes became very important , to sustain the competitiveness.

1. Our Group is a family managed Enterprise. The group gives full independence to the Executives who are in charge of different businesses and the involvement in the group is more in Strategy formulation level and the budget finalisation is done at board level. Once the budget is decided and allocation of resources is decided,  there is a complete independence to the CEOs on operational matters and  the CEO’s have the freedom of choice to change their tactics according to the emerging market dynamics. There is an effective  performance measurement and management system which is in operation which contributes a lot to the value addition to the overall performance of companies. The best practices adopted by a company within the group is being shared with other companies and group companies encouraged to adopt the best practices in all their operations. Balanced score card frame work has been used for Strategy formulation, implementation and performance appraisal. Business excellence frame work had been introduced in a few companies in the group and it is being introduced in phases across the group companies.
2. ICICI bank redefined the paradigm of banking in India.The banking business in India  today is totally different from the way banking was done 20 years ago in India. Under the Visionary leadership of Shri.K.V.Kamath, intensive automation of processes and reduction of manual intervention in operations enabled the bank to scale up the growth very fast. Several new initiatives were taken under Operational Excellence Initiative and Sig Sigma initiative, which helped the bank to acquire customers faster than others and enabled cross selling of products. The importance of  fee income had become equally important as that of core income and existing branch and IT infrastructure was effectively used to sell more products and services to the existing and new customers. The diversification into new geographies helped the bank to gain leadership in remittances business and cross border mergers and acquisitions. The creation of trading platform under ICICI securities helped the company to gain the leadership in the retail stock trading business. All this was possible through involvement of all employees and eliciting the best ideas from employees. There was a   reward system for the innovative ideas given by the employees. It was enabled by establishment of an Intranet which helped in knowledge sharing, training and transfer of best practices .

3. Thai Airways in Bangkok ,benchmarked its performance , systems and processes with the Airlines like Qantas, Singapore Airlines and Cathay pacific and fine tuned the strategies to become  more competitive. It has started hedging its fuel requirements and monitoring the performance of each flight operation. This helped the company to prune some routes, increase flights to routes where there was more traffic and optimise the use of fuel. This has improved the overall performance of the company.

NSE is a world class organisation led by a Visionary and committed leadership. The Forbes had acknowledged this fact and the leader of your organisation has been ranked among the top 15 leaders in the world and among the top three leaders in India.  NSE had set the global bench marks and redefined the way the securities trading was happening in this country with high transparency, good governance, robust processes and high quality standards. It ranks among the top three in volume in all its activities in the world and continues to improve its performance and if the pace of the Indian Economic growth continues, NSE will become the leader in all its activities in the Global arena.  Despite achieving an invincible leadership in the near term and far ahead of the competitors in all the performance parameters, the business excellence process has been identified as a key enabler for sustaining the competitiveness of the enterprise in the long run. This is the articulation of desired outcomes by your leadership  and the focus was not just on immediate opportunities and challenges, but also on building capabilities for the future.     

Business Excellence is a Journey and am sure every one of you is working towards the excellence in your organisation.

I would like to congratulate this year’s award winners and all those who are here on the Excellence journey. You serve as an inspiration for all other colleagues to continue the journey of  business excellence. I wish you all the best and  
 and have an wonderful evening.

Thank you.