The Edge Factor

Reviving growth through investment

Posted by CGN Team

Challenge will be to plan and execute in a far more dynamic environment.

Several countries can boast of investment-led growth with China being one of the best examples. The ‘Make in India’ initiative launched by the Prime Minister has the potential to achieve this for India. In order to increase the share of manufacturing to 25 per cent of the GDP, there is a large need for additional investment. However, a large part of this investment will be in paying people to execute jobs, leading to higher disposable incomes. This, in turn, can lead to a broad-based demand for goods and services in the consumer sector.

The Harvard Business Review of June 2014 projects that the current consumer spending of $12 billion in rural India’s consumer market will expand to $100 billion by 2025. This 21 per cent CAGR can help fuel the business plans of several companies. The rural market is already on a growth path. It has helped Dabur scale and increase reach to 30,000 villages within 18 months. Sales growth in rural markets is 42 per cent higher than in urban markets. Overall gross margins have improved.

Harnessing this potential growth is going to be a bit of a tightrope walk.

Infrastructure is both supply & demand

At its core, the ‘Make in India’ initiative is promising to make it easier to do business in India. This covers both government regulatory simplification, as well as improved infrastructure to run operations. So, while it becomes easier to open businesses and close factories, the initiative will also improve roads and warehousing hubs. Similarly, policy reforms will go hand in hand with digitisation. A total of 25 priority projects have been identified across various sectors to help debottleneck infrastructure issues.

The immediate impact of this infrastructure will be to improve access to markets, especially the growing rural markets. Industries such as FMCG, retail and pharma will benefit immediately. Those that require setting up dealers will follow.

The initiative will also create new jobs in these regions, helping move people away from agriculture which has a low value addition. For example, the Delhi Mumbai Industrial Corridor promises to triple industrial output and quadruple export from the regions it passes through. These jobs will, in turn, generate greater disposable incomes and accelerate demand.

A multi-front war

Or, at least that’s the plan. Will it actually happen? The real challenge lies in ensuring that this large number of initiatives happen approximately at the same time. Creating roads, but not implementing GST is unlikely to lead to lowering of costs and increasing economic activities. Similarly, providing 100% tax holidays for food processing, preservation and packaging won’t help if a lack of labour reforms discourages investment.

The real challenge for corporates will be to plan and execute in a far more dynamic environment. At a strategic level, companies will need to draw up plans, but they will also have to monitor the environment more closely and rapidly adjust plans. Similarly, capital commitments might be more cautious and extracting full value from existing assets will become important. Finally, processes cannot be left to evolve over time. They need to be designed so that they come into effect quickly and can be changed at short notice. When the road is bumpy and uncertain, what is needed is a skilled driver and good handling to reach the destination. Welcome to interesting times.