The hikes in interest rates, in quick succession by the Reserve Bank of India, amounting to a little under 100 basis points, is clue enough that the central bank sees price instability as a troubling factor. We have previously argued, many times over, that in our view the RBI was behind the curve and misjudged the fact that inflation was likely to become sticky, having previously viewed it as a transitory phenomenon. However, more recently, with numerical evidence it is clear that inflation is systemically ingrained and hence the hardening of monetary policy. The fact is, a lot of inflation is imported, with the war in Ukraine being the primary culprit. Commodity prices, both with respect to food and energy, have zipped upwards in a matter of months and it seems quite unlikely, at the present time, that they will correct in the near future. On the contrary, oil prices will remain stratospheric as European countries clamp down on Russian supplies, leading to greater demand pressures from other OPEC producers.
High inflation is the biggest impediment to consumption. In India, demand has stagnated or fallen over the past two years. Certain industries, such as two wheelers, which are accurate indicators of both urban and rural appetite, have been weak for some time. Between 2020-21 and 2021-22, India’s GDP grew by Rs 11.8 trillion, an increase of 8.7%. (Effectively, though, GDP was only Rs 2.2 trillion, or 1.5%, above pre-pandemic levels.) But it’s really the data on consumption that is disturbing. Private consumption expenditure accounted for 56.9% of India’s GDP in 2021-22, down from 57.3% the previous year, and just 1.4% higher than before Covid hit. This is despite the efforts of the government in providing fiscal stimuli targeted precisely to those sections of society that needed support the most.
The moderation of growth is a fact not limited to India. Most advanced economies are grappling with high inflation and falling demand. In fact, central banks with heavily bloated balance sheets are in a precarious position. The United States Federal Reserve has begun the process of quantitative tightening together with raising the cost of funds, a double whammy of sorts. Consequently, private consumption in America is likely to fall, affecting the growth prospects of emerging markets in general. India’s government and central bank will have to contend with a rising deficit on the current account with higher import costs for basic commodities. This coupled with the fact that fund managers have been scurrying to the safety of the US dollar, leading to capital outflows, will put pressures on the balance of payments. The rupee will consequently remain under downward pressures for the coming 18 months.
So, what should business managers do? Clearly, risks are weighed on the downside and consequently managers must prepare for this prospect. With consumption moderating, the greatest impact would be felt on those industries whose products are not ‘essential’. Consequently, consumer electronics, luxury products and perhaps even household appliances and the like, will see a temperance in demand over the coming 12 to 18 months. The hardening of interest rates, particularly in America, will impact the flow of funds and the provision of liquidity within the Indian financial markets. This may affect start up industries in particular, but also well-established ones as the cost of borrowing will rise. These economic developments are really beyond the control of business managers. All they can do is manage their operations in a way that minimises risk and exposure. Many have been complaining about rising input costs. They may now have the additional worry of falling demand. As investors and markets value margins as much as growth, CEOs must keep an eye focused on this indicator.
In a post-Covid world marked by a slowing global economy, rapid technological disruption and a volatile and complex business environment, enabling growth has become harder than ever. In turn, this makes the CFO’s role into that of a strategic business partner, capable of guiding the organisation to fully realise its growth plans. Ajay Aggarwal, Executive Director and Chief Financial Officer at Cyient, play a multi-faceted role – one that includes responsibility for driving business growth, improving business processes, mitigating risks, interacting with investors and grooming future talent.
For the CFO, the significance of day-to-day ‘Finance’ work is diminishing relative to new demands around business leadership. Apart from a basic technical/accounting background, the key skills and competencies today’s CFO must possess rest on four fundamental pillars: leadership, operations, controls and strategy. Sumendra Jain, CFO (India & Asia Pacific) at SMS India, believes that for Finance leaders to be effective business partners, they must have the necessary leadership and communication skills. Additionally, to be able to offer an independent perspective, they must possess a strong understanding of the company's business model and industry. CFOs should also be able to identify opportunities for top-line growth, manage downside risks and drive profit improvement, not just through the traditional methods of cost-control, but using new methods like product line/regional profitability analysis and benchmarking against industry players. Sumendra’s 25-year-long career offers insightful lessons and learning for executives in general and CFOs in specific.
India’s foreign policy choices have become significantly complicated with the Russian invasion of Ukraine. Apart from the immediate threat to world peace, the significance of China borrowing from the Russian template to fuel its own expansionist plans is lost on no one. For India, the choices are not easy, given its legacy of military dependence on Moscow, an ‘incomplete’ relationship with the US and the rise of an aggressive China at its doorstep. To seek a view on these issues, we hosted Jayadeva Ranade, former Member and Additional Secretary, National Security Advisory Board, and President of the Centre for China Analysis and Strategy, at a recent India CEO Forum session.
With growth opportunities abounding, companies are boldly looking at transformational deals to build scale and new capabilities. M&A activity in India is near an all-time high. Significantly, this wave is being led by first-time buyers, who accounted for over 80% of all deals closed in 2020 and 2021. However, there are continuing uncertainties around tax and regulatory issues arising from M&A. To optimise their M&A strategy, it is critical for CFOs to take stock of the evolving deal landscape and understand the tax and regulatory implications. At a recent session of the India CFO Forum, Pranav Sayta, Partner and National Leader of the International Tax and Transaction Services practice at EY India, presented an update on these issues.
In a break from the past, Indian politics is seeing continued stability at both the Central and the state level. The BJP won four out of five recent state elections, which has helped it consolidate its pole position in national politics. It has also set the course for the run-up to the next general elections in 2024 and will have implications for policymaking in both the immediate-term and the medium-term. At a recent session of the India CEO Forum, R Jagannathan, Editorial Director of Swarajya, an independent magazine, shared his outlook for Indian politics and policymaking in the long lead-up to 2024.
While there is little doubt that India’s GST regime has brought benefits, there are continuing challenges around implementation and compliance. These relate to e-invoicing, input tax credit, treatment of free samples and other such nitty-gritties. In the last five years, there have been some 830 modifications to the GST rules, and over 200 circulars have been issued. This makes it extremely challenging to keep track of changes. The government has proven responsive in terms of finding solutions and providing the necessary support to industry. However, a large number of legal/interpretational issues are unresolved, including the lack of a GST Appellate Tribunal, which makes it hard to resolve disputes without litigating. At a recent session of the India CFO Forum, Sandeep Chilana, Managing Partner at Chilana and Chilana Law Offices, reviewed the current GST regime and the top GST-related challenges facing CFOs today.