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.