Indian businesses were already facing several challenges when the Coronavirus pandemic brought the economy to a screeching halt. McKinsey estimates India’s GDP to fall by 20% for the first quarter of FY2020-21 while the World Bank forecasts the year’s GDP to drop by more than 3%. The Covid-19 crisis brought to limelight strengths and weaknesses of Indian firms, and now it’s time for them to take few pragmatic steps that place them in a better position to handle the prolonged economic slump and encourage growth in an uncertain “Next Normal” that might unfold post eventual recovery.
Increasing resiliency of balance sheets and cost structures
Debt, aggressive industry level competition and high fixed cost are the key hurdles for India Inc. According to a McKinsey research, 43% of the country’s long-term debt holding companies have an interest-coverage ratio lower than 1.5. Loss of revenue due to production stand-still in the lockdown coupled with debt toll has considerably weakened India Inc’s balance sheets.
Equity financing and partnering with strategic global investors to reduce the debt burden is a viable solution. Forging strategic partnerships for expanding India’s large companies could reduce competition and increase industry-level profitability. Switching to leaner cost structures could help companies to breakeven. Reducing fixed costs to about 30% (typically amounting to 49% of cost base) by switching to a leaner workforce model, using outsourcing and implementing digital technologies can increase cost resiliency substantially.
Redefining business portfolios for higher value creation
The lion share or 84% of India’s $1.1 trillion invested capital is centered around three value-depreciating sectors – Domestic services (30%), Energy and materials (39%) and Financial services (17%). The differential between the value-losing and value-creating industries is widening increasingly. As a result, the combined ROIC (return on invested capital) of India’s top 2500 listed companies slid down from 12% in 2008 to 8% in 2018.
Indian corporates must steer capital towards knowledge-led and innovation-led businesses that create higher value with minimal capital. Customer-facing digital initiatives, IT, insurance, renewables, health and wellness appear to be promising sectors that can capitalize on shifting consumer preferences, changing regulations and environmental necessities. Agriculture and the rural economy too are gearing for rapid growth. Due to government commitment promising $1.4 trillion investment for infrastructure – it offers a good opportunity.
Imbibing digital and analytics to revamp old and build new businesses
A Morgan Stanley report forecasted India’s internet users to reach the 914 million mark by 2027. Increased digital adoption by Indian consumers due to Covid-19 might accelerate the projection further. The pandemic has sounded the final alarm for businesses to adopt digital technology. While the demographic offers many opportunities, business leaders expressed interest in the following three domains:
- Digitizing sales and customer experience in B2C and B2B domains simultaneously to reduce costs and enhance customer satisfaction. Across sectors, senior executives stated that 60 – 100% of sales processes can be digitized.
- Digitizing manufacturing operations and supply chains for faster decision making and easier collaboration.
- Create a digital ecosystem of consumers and influencers to address customer-needs better.
Building safer, more flexible and productive operations
Restarting production while ensuring health and well-being of workers in the Post Covid era, is a huge challenge. Indian companies must implement proper protocols and measures following local rules to make workplaces safer. India’s manufacturing sector lags in productivity in comparison to China and South Korea (rated 4 times and 16 times more productive respectively). India Inc must lower this gap by increasing productivity in order to pursue contract manufacturing opportunities in pharmaceuticals, capital goods, auto-components, and the likes.
Adopt systems thinking in company decisions
Businesses in the present world are intrinsically connected globally. Whenever a company-wide decision is implemented with selective thinking adverse effects become visible. In the Post Covid hyper-connected world a company must work in unison. Covid-19 has highlighted several business excesses and drawbacks like unnecessary business travels, flawed rewards systems, etc. India Inc must broaden its decision-making sphere and take into account system-level effects on all stakeholders across the organization, community and environment.
By paying heed to the above five priorities companies can become more resilient and be better equipped to navigate the present economic stagnancy and grow successfully in the impending next normal.
Insights and facts gathered from McKinsey article “Five priorities for corporate India in the next normal after Covid-19” and Bloomberg Quint article “Covid-19 To Accelerate Digital Adoption In India, Says Morgan Stanley”.