Monday, May 14, 2012

Summary Exercise May 14, 2012

Read the following article and write a summary of around 70 words and tally it with summary provided on the Answers Page.

The hits just keep on coming. We've had the Standard & Poor's downgrade, a collapsing sensex, an eroding rupee - and on Friday the news that industrial output in March contracted by 3.5%, bringing the average industrial growth rate for the last fiscal year almost as low as it was during the global financial crisis in 2008-09. But the enormity of the negativity surrounding India's economy has even deeper roots than these problems.

We can call the fundamental factors causing that negativity the 'triple whammy'. Global corporates have been tentative about India for a while already. Those who habitually tour Davos will tell you that the browning off vis-a-vis India started at least two years ago. Coincidentally or not, it fits in well with the return of the UPA.

Government had initially dismissed it as just a phase. It insisted that the world was turning away from India only because Europe and the US had serious problems of their own in the wake of the market slump. Frighteningly, even those who examine 'moods' more closely were unable to see that while all those pullback factors were true, something was truly wrong in our Garden of Eden. Despite our huge demographic dividend, massive consumption demand and substantial market opportunities, global companies were showing an inexpli-cable new reluctance to enter the fray.

But the government continued to insist that any slowdown in investor enthusiasm was only scare-mongering by vested domestic interests pushing for more sops, freebies and tax breaks. And they insisted, last week, that this March we had attracted the highest ever FDI of $8.1 billion.

The 'triple whammy' or the three E's that i am focussing on had begun to operate well before all that - but it all came dramatically into focus last month when Adidas announced a Rs 1,350 crore hit and sacked its local Reebok management. Then, it proceeded to announce that 300 shops bearing the Reebok logo and 200 with Adidas logo would also be closed.

The blame was squarely placed on the Indian executive management for fudging the books. The big theme that resonated across the corner offices of global corporate headquarters was simply this: There is now reason to worry about Indian employees! By casting aspersion on the quality of Indian executives, Adidas had delivered a resounding blow to the corporate Indian psyche. This is the first of the three eroding E's.

The second E is worse. It is now recognised as a seething virus across the corporate landscape - a lack of faith in the nature of Indian enterprise. The fracas that took place in 2009 between Daiichi Sankyo, the Japanese buyers of Ranbaxy, and the original owners is merely the most obvious example of it. The US Food and Drug Administration banned the import of Ranbaxy medicines because of unresolved concerns over quality audits at two of its factories in India. Daiichi was forced to reveal a $3.8 billion loss on its Indian acquisition barely six months after the deal! Global distrust about big ticket acquisitions of Indian enterprise had reared its ugly head.

Distrust is something corporates everywhere, but more so in Japan, are spooked by. Ranbaxy is only an example. Below the radar, other giant Japanese corporations are also known to have had problems with large-scale buyouts of Indian enterprises. Whether the problem lies in their hurry or incompetence in doing their due diligence or in the even greater capability of some Indian managements to extract stratospheric value with devastating faultlines carefully papered over, is a matter both of conjecture and, unfortunately, now of some lawsuits. The word is now out that Indian entrepreneurs can't be trusted easily. E-2 is in place.

As if whammy E-1 and E-2 were not enough, the government too contributed its bit to the third E - ruining the business environment. Just one example should suffice. In the aftermath of the2G scandal, when the Supreme Court announced this February that licences were cancelled, its forthcoming spectrum policy and auction parameters made global corporations go cross-eyed. Whether posturing or otherwise, giant telecom majors from across the world have subsequently had to inform their boards that they are taking massive hits on their balance sheets. Global head honchos have had to issue ultimatums to the Indian government that they might consider withdrawing.

Irrespective of where the faultlines lie and who is to blame, all of this once again brings up E-2 - the culpability of domestic entrepreneurs in selling tainted goods to global partners. Rather than mitigate matters, the government has made them much worse. Whammy E-3 has now been delivered. The message that has gone out is that the government of India no longer cares about attracting investment.

Serious doubts have been raised about the three fundamental building blocks of business i.e. the quality of employees, the quality of entrepreneurs, and the environment crafted by the government. No amount of ra-ra-ing by Indian associations is going to work anymore. The image of India has been disfigured by the triple whammy of insult, injury and incompetence. What's left is the old fluff of a growing economy with 7% growth possibility, demand unmet and enthusiasm unbridled. But are these sufficient for giant global corporations? That's the real question.

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