Challenges Facing Indian Corporates Operating in a Low Growth Environment

Why are Indian Corporates struggling?

It would be an understatement to state that Indian Corporates are struggling. Saddled with huge debt that they accumulated and binged on during the “boom” years, they are now also facing the challenges of operating in a low growth environment wherein they can neither pay off the debt as they are not recording enough revenues nor they can take more debt since expansion and other activities are clearly unprofitable when the external environment is forbidding.

In other words, Indian Corporates are facing the “double whammy” of low growth and high debts which is the reason why many of the SMEs (Small and Medium Enterprises) as well as large firms such as the ones owned by Anil Ambani and the TATA group are either divesting some nonperforming firms in their groups or are resorting to debt restructuring and other forms of “kicking the can down the road,”.

While this is a temporary solution, how long can they deal the inevitable of bankruptcy and outright takeovers by other firms doing well or foreign investors remains to be seen?

The Party is Over

Further, the fact that the “party is over” regarding high growth and humungous expansion that was the characteristic during the first decade of the Millennium and into the second decade means that Indian Corporates necessarily have to find a way to grow and survive the present downturn.

Moreover, the fact that Foreign Investors are eyeing the struggling Indian Corporates for distressed asset purchases and other forms of equity purchase agreements means that they have to contend with friendly and hostile takeovers from bigger players as well.

What compounds their misery is that the twin shocks of Demonetization and GST (Goods and Services Tax) have added to their woes since both initiatives resulted in growth stalling across the board.

Prudent Corporates who saved for a Rainy Day are Doing Well

It is not the case that the situation turned dire suddenly or they were unprepared for this eventuality. On the contrary, many of the large Indian Corporates are simply “biding their time” for growth to return and then, launch new projects as well as expand aggressively.

Also, some of them such as the Reliance Group led by Mukesh Ambani has taken to sunrise sectors such as Telecom wherein they hope to be “game changers” with their forays that are based on massive spending and freebies aimed at pricing out the competitors using their large cash reserves.

Indeed, the fact that among the Indian Corporates, there are many Blue Chip and Marquee firms that are “sitting” on large cash reserves which they are now deploying to “Spend their way” out of the recession and the downturn.

Growth without Profits

This strategy has lessons for other Indian Corporates and aspiring Entrepreneurs wherein like individuals who save for a “rainy day”, firms that have been prudent during high growth periods survive the low growth times by using their reserves.

In addition, this is also a strategy that is being employed by many Internet and App based firms such as Amazon and Uber wherein they use funding from investors to simply expand and expand without caring whether they are making profits all with the objective of “hooking” customers and building market share.

While the merits and demerits of this strategy are debatable, the fact remains that such firms can make the most when growth returns since they have a large customer base that is loyal and brings in repeat business.

Downsizing and Cost Cutting

However, not all Indian Corporates are lucky enough or prudent enough to have either investors who are willing to back them or have large cash reserves that they can use. This is the reason why many firms such as L & T are laying off employees by the thousands as a means of staying the course during the present downturn.

Moreover, the fact that even the IT (Information Technology) which grew at dizzying rates during the boom is facing uncertain times means that they are also downsizing in addition to cutting costs wherever they can.

Thus, it is clear that all these trends spell trouble for the Indian Corporates who are now experiencing perhaps the “first serious domestic downturn” since the Indian Economy was liberalized in the early 1990s.

Policy Measures and Stimulus

This has resulted in many of the Indian Corporates calling upon the Government to step in to help them out and responding to such pleas; the government has announced a series of spending measures that include Trillions of Rupees to be spent on Infrastructure and Debt Restructuring.

While it is early days to judge whether this Stimulus would be effective, at least there has been some movement of sorts in the way the Indian Corporates are being encouraged to think of ways and means to “ride the recession”.

Domestic Gloom amidst Global Boom

Lastly, this is a unique situation as far as Indian Corporates are concerned since oil prices are low as well as global economies are rebounding, and hence, this downturn cannot be simply blamed on external factors.

Thus, this creates a challenging macro and microenvironment for the Indian Corporates who now have to innovative or perish just like they were told in 1991 to “export or perish”. To conclude, what the Indian Corporates need are out of the box thinking and the revival of the “Animal Spirits” which can help them rebound from this low growth phase and start reviving again. Until then, one has to keep one’s fingers crossed as to the future of the Indian Economy.

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