Impact of a Possible US Recession in India

Though no one likes or wants a recession, almost everyone appears (looking at WEF, Davos) reconciled to one in the United States. Meanwhile, politicians continue to downplay any fears of global repercussions, citing decoupling of the United States and other economies as a buffering factor. But what is the reality for countries like India?

It would be naïve to imagine that a recession in the United States would have no impact on India. The United States accounts for one-fourth of the world GDP and any significant slowdown is bound to have reverberations elsewhere. On the other hand, interdependencies between the US economy and emerging economies like India and China has reduced considerably over the last two decades. Thus, the effect may not be as drastic as would have been the case in the 1980s.

Even so, fears of a US recession led to panic in the Indian stock market. January 21 and 22 saw a meltdown with a mind-boggling US$450 billion in market capitalization being vaporized. An unprecedented interest cut by the Fed led to a bounce-back on January 23 and at the time of this writing, the benchmark index (BSE) has gained 2.5%, almost in line with Hang-Seng, Nikkei, and Kospi.

History might hold a clue here. The last time the bubble burst (2001-2002), the DJIA went down by 23%, while the Indian Index fell by 15%.

Much has happened between then and now. The Indian economy has shown a robust and consistent growth trajectory and the projection for 2008 is 9%. Indian exports to the United States account for just over 3% of GDP. India has a healthy trade surplus with the United States.

In other words, the effects of this recession on India may be quite distinct from those of the past. Here are some areas worth following:

1. A credit crisis in the United States might lead to a restructuring of asset allocation at pension funds. It has been suggested that CalPERS is likely to shift an additional US$24 billion to its international portfolio. A large portion of this is likely to flow into India and China. If other funds follow suit, a cascading effect can be expected. Along with the already significant dollar funds available, the additional funds could be deployed to create infrastructure--roads, airports, and seaports--and be ready for a rapid takeoff when normalcy is restored.

2. In terms of specific sectors, the IT Enabled Services sector may be hit since a majority of Indian IT firms derive 75% or more of their revenues from the United States--a classic case of having put all eggs in one basket. If Fortune 500 companies slash their IT budgets, Indian firms could be adversely affected. Instead of looking at the scenario as a threat, the sector would do well to focus on product innovation (as opposed to merely providing services). If this is done, India can emerge as a major player in the IT products category as well.

3. The manufacturing sector has to ramp up scale economies, and improve productivity and operational efficiency, thus lowering prices, if it wishes to offset the loss of revenue from a possible US recession. The demand for appliances, consumer electronics, apparel, and a host of products is huge and can be exploited to advantage by adopting appropriate pricing strategies. Although unlikely, a prolonged recession might see the emergence of new regional groupings--India, China, and Korea?

4. The tourism sector could be affected. Now is the time to aggressively promote health tourism. Given the availability of talented professionals, and with a distinct cost advantage, India can be the destination of choice for health tourism.

5. A recession in the United States may see the loss of some jobs in India. The concept of Social Security, that has been absent until now, may gain momentum.

6. The Indian Rupee has appreciated in relation to the US dollar. Exporters are pushing for government intervention and rate cuts. What is conveniently forgotten in this debate is that a stronger Rupee would reduce the import bill, and narrow the overall trade deficit. The Indian central bank (Reserve Bank of India) can intervene anytime and cut interest rates, increasing liquidity in the economy, and catalyzing domestic demand. A strong domestic demand would also help in competing globally when the recession is over.

In summary, at the macro-level, a recession in the US may bring down GDP growth, but not by much. At the micro-level, specific sectors could be affected. Innovation now may prove to be the engine for growth when the next boom occurs.

For US firms, who have long looked at China as a better investment destination, this may be a good time to look at India as well. After all, 350 million people with purchasing power cannot be ignored. This is not a sales pitch for India, but only a gentle suggestion to US corporations.

The Secret of Success in a Failing Economy

It goes to show that timing isn't everything. Here we are, amidst the greatest economic failure since the Great Depression, and two high-profile writers are out with big new books on the surprising secrets of what makes people successful. What's more, both of these students of success are enamored of the same secret--a lesson drawn from research on super-successful violinists at Berlin's Academy of Music.

One of the stars of Outliers, the bestseller from Malcolm Gladwell, staff writer for The New Yorker, is a psychologist named K. Anders Ericsson, who did an investigation of three different groups of violin students: the unquestioned stars, those who were good but not great, and those who had no hope of becoming professional musicians. What separated the stars from everyone else? It wasn't raw talent, Ericsson concluded. (Every student had huge talent.) It was sheer persistence--those who practiced harder did better, and those who practiced insanely hard became wildly successful.

Gladwell dubs this phenomenon the "10,000-hour rule." Becoming great at anything--sports, science, business--requires ten years of practice and 1,000 hours of practice per year. "Ten thousand hours is the magic number of greatness," he argues.

Geoffrey Colvin, a high-profile editor at Fortune magazine, is equally smitten by Ericsson's research. In his new book, Talent is Overrated, Colvin doesn't just embrace the importance of ten years of practice. He explains just what sort of practice is required--a regimen that he calls "deliberate practice."

What are the elements of deliberate practice? It's designed explicitly to improve performance--the little adjustments that make a big difference. It's repetitive, which means that when it's time to perform for real (sinking a putt, pitching a product), you don't feel the pressure. It's informed by continuous feedback; practice only works if you can see how you're improving. And it isn't much fun, which isn't all bad. "It means that most people won't do it," Colvin says.

So what does this thinking about success tell us about how to succeed in perilous times? For individuals, one message is that practice does make perfect. So if you're a computer programmer who's spending fewer hours writing code, or a product designer whose portfolio of projects is shrinking, or a customer-service specialist with fewer customers to serve, don't let down time become wasted time. Turn it into practice time--find ways to work intensely and deliberately on your technical and business skills, confident that hard work will pay off in the long run.

The more jarring message comes for companies and their leaders. We're still early into the downturn, but already big companies are reacting the way they always do. They are encouraging their highest-paid, most-experienced performers--that is, those with the most practice--to be the first to leave. Last year, in perhaps the most famous example of this brain-dead, knee-jerk policy , Circuit City, the giant electronics retailer, announced its so-called "wage management initiative." The plan: fire its most talented and experienced employees in favor of younger workers making less money. Of course, customers who visited the stores looking for advice got much less of it, which meant they took their business elsewhere. The result? Last month, Circuit City filed for bankruptcy.

It would be funny were it not so common--and so wrong-headed. Indeed, New York Times media columnist David Carr recently looked at the Circuit City fiasco and asked an uncomfortable question: How is what the widely derided leadership of Circuit City did any different from what the leaders of our most respected media companies are doing?

The media business--print, national TV, local news--isn't just downsizing. It is inviting its best-known, most-experienced (and thus, highest-priced) talent to be the first out the door. Legendary sportswriters, iconic anchormen and anchorwomen, influential columnists and pundits--all are heading for the exits with the blessing of management, replaced (if at all) by inexperienced newcomers who can't hope to meet the standards of their predecessors.

How's this for a secret of success? You don't survive a downturn by encouraging your most experienced people to leave. Perhaps more business leaders can resist this wrong-headed practice--and hold on to those employees who have had the most practice in their careers


Ref : Harvard Business Review

Another half-hearted stimulus package

After the RBI’s stimulus package announced on Saturday, it was the turn of the government. The central government introduced a 10-point, Rs 320 bn package on Sunday to stimulate the Indian economy. Ironically, this so called ‘stimulus’ will account for merely 0.6% of the country’s GDP! Not surprisingly, the industry’s reaction to the package has been lukewarm as it was expecting an even larger package. The funding routed to the infrastructure sector is to the tune of Rs 200 bn. Central valued added tax has been cut by 4% across the board, other than valued added tax. Labour intensive exports such as textiles will also receive sops. Small scale industries will be eligible for funding without collateral to the tune of Rs 10 m per entity. Although the government has not ruled further steps, it operates under severe fiscal constraints. It may be noted that the Rs 320 bn infusion will nearly double India’s fiscal deficit from an earlier projected 2.5% to 5% of GDP by the end of FY09. When viewed in combination with the RBI’s actions, we believe the efforts definitely point towards the right direction. However, they may not be sufficient to stimulate the economy.

The winner-takes-all economy

Across industries and nations, a select few companies are creating almost all of the new shareholder value. Atomization is driving their success.

A striking performance gap is appearing throughout global equity markets. In industry after industry, spanning both the new and the old economies, a small set of companies is creating almost all of the new shareholder value. Simultaneously, the value of their less successful competitors is actually declining, and to an unprecedented degree.
The polarization of winners and underperformers is intensifying. Once, a chief executive officer could claim that the performance of the industry, not the company, was the prime mover for stock prices. But with the advance of globalization and technology, companies whose products or service models have the slightest edge over the competition can quickly exploit that advantage. Investors are scrutinizing companies one by one, screening out those with merely average performance and investing the bulk of their money with the top one or two players in each arena. This phenomenon has created a "winner-takes-all" dynamic in which 5 to 10 percent of the companies in a given industry create all of the shareholder value.
In most industries, the new winners are "atomizers," which focus on narrow industry segments where they can achieve a dominant position, even though they may hold only a small fraction of the assets or revenues in their industries. Some of the atomizers are first-to-scale newcomers, which capitalize on wholly new markets that are usually created by technological discontinuities. Others are attackers, which extract value at the expense of industry incumbents. Both types of atomizer launch and expand focused businesses that capture returns highly disproportionate to their size.
This new model is, of course, in stark contrast to the old scale-driven notions of successful corporate strategy. But the evidence is compelling: size, scope, cost economies, and vertical integration are much less important than they used to be. In this brave new world, the evidence suggests, start-ups and attackers are capturing the lion's share of value. Nevertheless, several large incumbents, including Enron, IBM, Nokia, and Texas Instruments (TI), have transformed themselves and emerged as winners.