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New Delhi: As India pushes forward in its stated goal of achieving developed nation status by 2047, its 100th year of Independence, the focus is not only on increasing the size of the GDP, but also on the per capita GDP. With average incomes lagging even other emerging economies, India has its task cut out.
One way of moving towards higher incomes is to have bigger companies with wider businesses and, therefore, more employment opportunities. They may come through mergers and acquisitions (M&As), or through brownfield and greenfield expansion, or even through a sizeable increase in the number of MSMEs (micro, small and medium businesses).
A group of top CEOs took on the subject with gusto at a brainstorming session in Mumbai recently, with views and counterviews flowing thick and fast.
The world’s biggest aluminium manufacturer, Hindalco Industries, was top of the table, along with JSW Steel, one of the world’s biggest steel companies. Hindalco had famously acquired American aluminium company Novelis in 2007, when Novelis was a much bigger company by revenue.
The honchos of Hindalco and JSW Steel felt India’s future was strong, and manufacturing would need to play a strong part in India’s drive towards developed nation status and higher per capita income.
“How quickly we can scale up the opportunity in manufacturing is going to be critical,” said Satish Pai of Hindalco. “There are other sectors that will play their role, but manufacturing has to play its role in the future of the country if we have to get to that because it provides steady jobs, it provides a reasonable level of income, and more interestingly it provides those jobs in what I call the heartland of the country.”
Pointing out that Hindalco’s plants are in fairly remote parts of India, Pai said that “the ability to provide people who live in that area quality life and jobs is going to be critical if India is going to move towards being a developed country”.
He added that mining was equally important, and countries like Australia, Canada, the US, Brazil, Argentina, and Chile have done a lot of development through mining, unlike India, where “mining industry is seen through a pretty bad lens. So, players in the industry like us have to make mining socially acceptable, we have to do mining in a clean and sustainable way. “If you compare us to China, we are far richer than China in many of the natural resources, so there is a great opportunity for us,” Pai said.
He added that players in the industry have to make mining socially acceptable, and do mining in a clean and sustainable way, because India has rich natural resources. “If you compare us to China, we are far richer than China in many of the natural resources, so there is a great opportunity for us,” Pai said.
Jayant Acharya of JSW Steel agreed with Pai, and pointed out that relatively speaking, India had a stable political regime and reforms. At current growth rates, the per capita income is likley to be doubled in a decade, but the opportunity is there to take it up 3X, Acharya said.
“If you look at Japan in 1970s, Korea in the 1980s, and China in mid-2010s, all of them have by and large doubled in 10 years or a little more than double in 10 years or so,” Acharya said. “So, India’s opportunity is during this period. I would say (the next) decade will be a very, very important phase for India’s growth.”
Acharya added that India is currently in a nation-building phase with infrastructure, energy transition etc. And then there’s the potential of increasing consumption.
“As the per capita income grows, we see the discretionary spend increasing, which will increase your housing, automotive, appliances, consumption in various forms,” he said, adding that the other good thing that has happened and that feeds into this is the digital interface of UPI and Aadhaar.
Several speakers pointed to the need for an enabling environment from the policy perspective, especially in terms of Centre-state relations, for companies to grow and scale to global levels.
While he agreed that manufacturing as an industry will surely see sustained levels of growth, Mahesh Chhabria of Kirloskar Industries pointed to some challenges. “Centre has one outlook towards industry, states manage differently; the Centre and state coordination doesn’t work in the same breath,” Chhabria said, adding that while it’s easy to say one has a mine, but to start and continue operations efficiently is not easy.
“If we as industry can still thrive in this chaos, we’ll do even better if chaos is removed,” he said. “So it’s for policy makers and administrators and bureaucrats to realize the importance of enterprise and allow them to prosper with better scale. And it’s only a little bit of tweak in the mindset which is going to make this become more efficient.”
The lawyer in the group, Vikram Raghani of JSA Advocates & Solicitors, spoke of the difficulties in the legal ecosystem. Comparing it with the lack of last-mile connectivity in urban transportation in Indian cities, Raghani said that it was true of our laws and regulations as well.
“We have somehow not been able to give that last-mile connectivity to spur growth, to spur scale, to increase M&A,” Rahgani said, adding that it was critical to work on how to make it easier for “folks to acquire companies, delist them, take them private, grow them, acquire more companies, etc.”.
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He also pointed to foreign investors being “scared” of our judicial system especially because of long delays in litigations. “We’ve tried to reduce burden on our courts by making tribunals, but we’ve ended up burdening our tribunals,” he said. “And that’s often a negative from a foreign investor’s perspective. So judicial reforms is another area that we need to look at if we have to achieve that scale of growth.” He also pointed to the need to uncomplicate India’s regulations.
Gautam Khanna of Hinduja Hospitals lamented the lack of scale in healthcare, saying that for 1.4 billion people, the sector is only about ₹4 trillion in size today. “But if you see the issues, one can look at access, availability, affordability, and accountability.”
“Access means there are not enough providers, so not enough beds. As per WHO standards, today there is a shortage of 2.4 million beds in the country. To build that, the capital spend is $210 billion. That means if money comes, it will give a spur to the economy.”
Saying that healthcare is a very manpower-intensive sector, Khanna added that for one bed you generate seven direct jobs, and 30 indirect jobs. “So that means even if you are talking about primary, secondary, etc., we are talking about more than 4 crore jobs in the country.”
Vishal Kampani of JM Financial spoke of “friction” being a big point in Indian business. “How does the government set up a task force internally which basically reduces friction to drive GDP growth?” Kampani said. “This is something all of us together should pitch.”
Kampani added that the government needs to get approvals to be faster, hear industry more openly, trust them more, and let GDP grow faster. “If GDP grows faster, you’ll see the benefit of that… in 10-20 years, per capita GDP will ramp way faster because population growth is not going to keep up.”
He also stressed on the need to create more MSMEs to drive employment growth. “In the US, 150 million people, half of the US population, are employed by 25 million MSMEs,” he said. “If India has to employ half of its population, 750 million people, over the next 10 years, just going by the same ratio of average six people per MSME, you need 125 million MSMEs.”
He added that India has to grow 10x its small businesses because large businesses don’t need many people.
To this point, Pai of Hindalco said that as in countries like China and Korea, “you need large firms and you create an ecosystem of small firms around the large firms”.
“You need large firms like us to expand, and then as we get into more value added (manufacturing), the whole ecosystem of smaller companies around us starts to happen,” Pai said. “It’s like a jungle; you need all sizes of animals to make the jungle work.”
Vibhor Talreja of Eversource Capital, a private equity firm that heavily invests in renewable energy companies, said that renewable energy has been a success story for India. However, we have not been able to create businesses of as much scale as we would have liked.
“That is partly because as an industry structure or industry attractiveness, it’s a very capex heavy industry and the returns are very moderate, so no one individual or promoter group or private equity firm would like to own a very large franchise,” Talreja said.
He also said that there should have been more examples like Motherson Sumi in automobiles, where the promoter took over dying assets in Europe and make profitable businesses of them.
“That has not happened to the same extent in a lot of other industries because that was literally taking business from other economies, and bringing them to India at size and scale,” Talreja said. “Auto industry is an established domestic industry and hence there was room to transfer business here. The pharma and chemicals industries are finding their foot on the domestic side, and once that happens, you will see a lot of European assets coming to Indian corporates, particularly on the chemicals side.”
Global M&As by Indian companies
To the point on why Indian companies are not doing global M&As on the scale of the mid-2000s, such as a Hindalco-Novelis or a Tata Steel-Corus or even a Tata Motors-Jaguar Land Rover to create super-large companies, the panellists felt that on the contrary, Indian M&A has come a long way despite such big-bang deals not happening.
Pointing out that while foreign companies buying out Indian firms was the clear trend in those days, the panellists said that the situation has changed reversed.
“You are seeing, particularly in cement and many other industries, domestic players acquiring the foreign partner,” said Mathew Cyriac of Florintree Advisors. “So while the M&As may not have been big news in terms of global acquisitions, the consolidation within India has been a big story, with the Indian partner buying out the MNC partner across industries in many cases.”
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Chhabria of Kirloskar Industries said global competition is no longer a threat to Indian companies, rather it is vice-versa. The level of inbound inquiries is now 10x of what it was till three years ago, he added.
“We have growth rates, population, consumption, and now we have the multiples,” said Chhabria. “This is the first time in the history of corporate India and the equity capital markets where the multiples are in our favour, which means you can use currency to acquire.”
He added that MNCs get much higher multiples here in India because growth is much higher than in the west. “People want to invest for growth,” he said. “Quality of growth, sustenance of growth, and quality of earnings are far superior here versus in the western world.”
Another speaker, Raghani of JSA Advocates & Solicitors, felt that it is time for the Indian government to enable domestic companies to do big bang M&As outside the country.
“Today, regulatorily, an Indian company is capped up in terms of what it can do outside India, you cannot go beyond 4X your size outside India (one cannot invest equity more than four times the networth, though it can be financed from outside),” Raghani said. “That’s a limitation in the context of how we are performing today, how competitive we are today, how we are able to marry manufacturing and technology today.”
Raghani suggested the government should consider some baby steps such as “maybe remove that cap or enhance it at least in sectors like IT services where we have done exceptionally well… and that would then enable us to not only grow in India but grow globally”.
Innovation engine coming alive
Another aspect that the panel debated was innovation at a corporate level and the creation of IP, considering that India has not produced a company with a great product at a global scale, such as Apple or Google or even Nvidia.
Vishal Kampani argued intensely that the situation was changing and that India is going to see deep innovation in the coming years, given recent developments in the country’s investment ecosystem.
“The US is a rich country and it’s been rich for very long, and bulk of the innovation started because of corporate venture capital as well as wealthy families who a couple of decades ago exited their businesses, put money into venture capital, and encouraged Innovation,” Kampani said, adding that the other advantage the US had was that it had a readymade market of rich people willing to experiment with new, innovative products, which allowed companies the margin to put more dollars behind innovation.
“That’s happening in India…generational wealth has been created in India in the last five years,” Kampani said. “India has not seen a stock market boom that it has seen in the last five years in the previous 50.” Kampani added that with India’s market cap skyrocketing during this period and continuing, “you will see that kind of investment coming from family offices, they will pour money”. That, in turn will lead to a lot more innovation in India over the next five years.
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