Global Footprints of Indian Companies-A Must for Accelerating GDP Growth

1. The Vision: Driving Towards a US$ 10 Trillion Economy

Ambitious GDP target of US$5 trillion by 2024! I strongly believe we have potential to achieve even higher - maybe even 10 Trillion or more GDP size by 2030 or earlier - as the Lord Buddha saying goes “believe in yourself and no one & nothing can stop you”. While many experts & analysts have written on “what” should be done to achieve GDP target, in this article, I would be rather focusing on the “how” part, i.e., the execution piece as to how India can drive itself to achieve a US$ 10 Trillion GDP Mark.

Let’s first be clear about the motivation behind increasing our GDP, i.e., size of economy. India is today’s 5th largest economy with GDP of $2.94 trillion, but per capita income is just much lower with millions of people, around 3% of population still below extreme poverty. The key reason we need to drive for higher GDP growth, $10 trillion or even more, is to drive productivity, employment and finally improving per capita income at least 5 times thus empowering our citizens to achieve their basic rights to education, health and good quality of living.

2. Comparative Analysis: India vs. USA & China

When we compare to USA & China:

1. India’s GDP is 1/10th of USA & 1/7th of China.
2. India’s per capita income (i.e. income per citizen) is just $2k, 1/30th of the USA & 1/5th of Chinese citizens.
3. India’s Market Capitalisation (i.e., valuation of all our Companies listed on Indian Stock Exchange) is 83% of GDP against USA 176%.
4. India’s National Debt is the most conservative at 67% of GDP against USA 116% of GDP.

Key inference we can draw from the table below is there is a direct correlation between Market Capitalisation and GDP. The bigger the size of corporations in a country, the larger the GDP. So, we need to analyse what we have to do differently to produce large ‘Market Capitalisation’ corporations.

To answer that question, we need to ask ourselves: What does India lack and why are we not able to produce ‘at least’ 3 Global companies such as Apple, Microsoft and Google? The market capitalization of each of these 3 companies cumulative is USD $4 trillion higher than the market capitalisation of the entire Indian Stock Market (US$2.2 trillion) despite being a country having an abundance of land, a country with the best demographic (Labour) in the world (young population) & best human capital. So, what does India need to do differently in order to be able to produce at least 3 Global Companies with >$1 trillion Market capitalisation in the next 10 years?

In the table below, you will notice that while India has listed companies higher than USA & China, not a single company with US$1 Trillion Market Capitalisation! What is stopping us to reach the $1 trillion milestone?

One key reason for this is that Indian Companies despite best management, corporate culture and highest governance model are not able to become global companies, i.e., companies whose consumers are spread across the globe say more than 75+ countries in the world? We need to create our own ‘Global’ brands to create large Market Capitalisation, resulting in higher GDP for the economy (as per co-relation shown in Table 1 above) - let’s move forward and analyze this further - Why are we not able to achieve this milestone? (despite all challenges)

3. Back to Basics: Land, Labour and Capital

In order to answer that question let’s rewind and go “back to basics” - We all know that land, labour and capital are the three main ingredients of business. The article primarily focuses on the ‘capital’ element as so much has already been written and said about ‘land and labour’ reforms.

One easy & favorite argument of all experts generally is that we should increase our investment in ‘research & development’ multiple fold to promote “innovation”, that’s a fair argument and definitely lots to be done in this area so that as a country we should be able to produce at least one innovative product. (US $1.4 trillion Market cap of a single company, representing 52% of India’s GDP). However, it is important for a country to focus on ‘execution’ piece as well as to how can we make our ‘policies’ and ‘processes’ efficient to enable execution of those innovative products.

So, let’s focus in this section ‘what best can we do’ in terms of execution, within the current opportunities we have on hand in automobile, pharma, chemical, cement, FMCG, banking industry & last but not the least the new fab - digital money.

Land

Land is a natural resource and one of the main ingredients to start a business but as we know “Land” is a scarce resource as well, i.e., a country cannot produce or increase the amount of land they have even if they want to. Fortunately, India has an abundant and huge ‘land bank’ which is rich in mineral resources as well. So from capability point of view we have a big advantage here over other countries.

However, the key question is: How do we make our land policies efficient and industrially friendly in order to make the best use of it? I think we all agree that we need drastic land reforms. Listed below are ways we can make our use and efficiency of land even better:

• Digitisation of land records
• Trading of land in dematerialisation form
• Categorising land into a) Industrial, b) Agricultural, and c) Railway land (relevant for India).

The aim of simplifying this is to make sure land availability for industry is available in the most easiest & transparent way and we make our land more productive whether in the field of ‘agriculture’ or extraction of ‘mineral’ resources. Government should define top 3 measurable KPIs (Key Performance Indicators - Measurement of success) - and then ensure, all policies are designed & implemented to achieve those KPIs. These KPIs should be published on monthly basis.

Labour

India is the 2nd most populated country in the world. So, again like land, labour is abundant in supply in comparison to other countries and the best part is our demography – we are a young nation with 40% of the population < 35 years. So, this resource as well we have in plenty - so now the question here is: How can we make our labour laws more efficient & competitive globally? How can we make our ‘labour’ more skillful. In this competitive world, can we afford to have laws that do not promote meritocracy and promote socialism? There are various other ways to promote socialism, but let’s not be over protective about our labour especially when it makes our products ‘expensive’ & ‘uncompetitive’ than in the international market while competing with global peers. Our labour laws should promote industry growth and not cripple them. Here, as well, the Government should define Top 3 measurable KPIs and publish them on monthly basis.

Funds / Capital (Equity and Debt)

I would say currently for India, in comparison to ‘land’ and ‘labour’, ‘access to capital’ is a major hurdle for our entrepreneurs to become ‘global’ companies. Indian entrepreneurs have somehow managed to overcome challenges in ‘Land’ and ‘Labour’, despite all negatives vs global peers. However, it is the ‘shortage’ of Capital which I would say causes more than 50% of enterprises to shut down their operations.

Let’s evaluate where we stand on the ‘debt’ matrix vs. our global peers:

• Corporate debt size: 51% of GDP in India vs. 163% in China and 80% in the US.
• Rate of Interest (cost of funds): 8% to 10% in India vs. sub 3% in USA / China.
• Default rate: Highest in India at 40% vs. 6% in USA and 24% in China.

IMF data ranks India 33 among 137 nations with a bad NPA ratio in descending order. Of the 32 countries with worse ratios, 16 are in Africa. Agree, we have a big problem here. Hence, we should look at expanding our corporate debt considerably at ‘interest rates’ competitive to our global peers.

4. The Five (5) “Big Changes” to Build Star Companies

So, what are the five (5) “Big Changes” we need to execute to rebuild confidence in Indian Corporates and ensure abundance ‘Funds’ inflows for Indian Companies, to enable them to achieve their full potential and am sure by doing so few ‘star companies’ who dream to become ‘Global’ companies will born with US $1 Tn Market cap:

1. Change in Attitude

We need to do an in-depth study on options available to entrepreneurs to raise funds for their businesses - whether ‘capital’ or ‘debt’. The policies, processes, rules & laws related to raising capital or granting debts needs suitable reforms. We all know one basic tenet of any business to grow is ‘ability to take risks’, whereas Indian entrepreneurs are constantly afraid of ‘failure’ rather than focusing on ‘growth’.

The fears with which a small or mid-size entrepreneur lives with today are:

• How do I raise capital or debt for growing my business? Where will I get additional funds, even if I grow? - What is the motivation for me to grow when I cannot have access to additional capital or loan?
• What will happen if my business fails due to external factors? How will I repay my loan?
• How will I arrange for collateral to raise debt?

The Indian Banking system and Government of India has a major role to play in order to be able to provide following support to corporates into becoming Global Companies:

• Step 1: A structural way of access to Capital or debt viz equity, granting or extinguishing debts, even if it means taking ‘risk’.
• Step 2: Nurturing companies to become successful at home turf.
• Step 3: Last but not the least, giving them required support to go ‘Global’.

At macro level, India is at a strong short term debt cycle, compare to its global peers where interest rates are significantly lower - near to zero! We have a unique opportunity to expand our corporate debt effectively to increase productivity by reducing interest rates. Hence, Monetary policy support is need of the hour.

2. Change in Processes: “Ways of Doing Things”

As mentioned earlier, we should review end to end existing policies & processes related to all the ‘sources’ of funds for all sizes of corporates (Small, Medium & Large enterprises) whether it is about raising ‘Capital or debt’. Corporates should have ease of access to these ‘sources of funds’ where there is reward for good performance & financial penalty for ‘default’. I have picked in this article as an example one of the key source “Corporate debts” issuance by banks. Similar exercise can be done for other sources of funds as well.

The mantra is “let’s play a game, let’s take a risk, let’s play ‘1 million to 1 billion’ corporate innings!” Below table depicts how the banking system can play a critical role in ‘corporate life’ journey of an enterprise from a $1mn to $1bn marathon!

All of the above steps need to be incorporated in our “Corporate debts” approval cycle to ensure we reduce our ‘default’ rates significantly and at the same time expand our Corporate debt size from 51% to at least 100% of GDP by March 2022 and at the same time improve our default rate/NPAs to same levels as USA, Australia at <5%.

3. Change in “Belief”: Mentoring & Coaching

4. Change in “Scale”: Access to Global Platforms

5. Change in “Strategy”: FDI - Foreign Ownership & Cost of Capital

5. Conclusion: Capturing the Big Growth Opportunity

The above ‘Changes’ shall go a long way in enhancing confidence of Indian businesses (small, medium & large) enabling them to grow their business multiple fold times, and contribute to nation building by driving GDP growth.

True testimony of success shall be to convert “Indian companies” to be at least 3 large corporates of US$1 trillion+ size & 25 large corporates of US $ 0.5bn+ Market Capitalisation in next 10 years - can we? Yes, we can. India has the potential to capture a big growth opportunity in this decade and change the course for generations to come.

As Warren Buffet saying goes “Someone’s sitting in the shade today because someone planted a tree a long time ago.” ∎∎∎