Aside: On Kashmir

  During a recent break from the relentless pace of work, I managed to get some long pending reading done. Two books that really gripped me were "A Teardrop on the Cheek of Time - The story of the Taj Mahal" by Diana and Michael Preston and the more contemporary treatise on Kashmir, "Curfewed Night", by Basharat Peer. Both books are amazingly well written in  a style that is both simple and direct. And though the two were seemingly unrelated, there was a historical context. For it was the Mughal emperor Akbar, grandfather of the main protagonist in the story of the Taj, who invaded Kashmir in December 1585 and overthrew the local ruler Yusuf Shah Chak, thereby ending a period after which Kashmir would never be 'truly' free again. Interestingly, Basharat also highlights Yusuf Shah's imprisonment and subsequent betrayal by Akbar as having become a metaphor for the relationship between Delhi and Srinagar. Basharat's book is much more and tells the story of the transformation of Kashmir and its people through its most trying period in history. Even after having spent some time in the valley and having followed the rise and ebb of its fortunes over time, I find the book an eye-opener. But if it of any consolation to Basharat, the sentiments and the stories in Curfewed Night could be of any one of millions of others all over India who have become frustrated by the incompetence of our elected representatives and the workings of a government that appears to be out of touch with reality and becoming increasingly self-serving by the day.

SCP

   There is heightening perception that rate cuts will not prevent India's corporate earnings growth from significantly  cooling off. Confidence levels of companies about business prospects have declined with several companies resorting to lowering capacities and trimming staff in anticipation of lower demand. Even though the finance minister is confident of a return to 9% next year, market participants are not convinced, with a broader consensus being 6-7%. At this growth rate, the premium in share valuations which Indian companies have commanded in the recent bull-run could erode further. The global perception that emerging markets should trade in single-digit multiples could present some more downside risk to Indian equities. With the Sensex trading at 8.5 -9.0 times 2009-10 estimated earnings, though at higher valuations compared to other emerging economies makes it vulnerable to further downgrades as there is still a lack of clarity about the extent of the economic slowdown.

I have been using this newsletter to deal with macroeconomic and political factors of business performance. From this issue onward, I will begin to touch up the topic of Business Performance Management , our core area of expertise. I will be looking at performance management practices, frameworks, tools and software packages out there and the state of the art in management thinking with respect to the elements of business performance - strategy, structure, culture, process and systems. This week, I pick up on an article on the SCP framework in the McKinsey Quarterly that I read just earlier.

The SCP (Structure-Conduct-Performance) model is an interest tool to analyze businesses striving to compete within a market[McKinsey Quarterly, Jul 2008]. "The model's original form depicts the influence of an industry's structure (for example, the growth of demand and barriers to entry) on the conduct of producers (pricing, for example) and the performance of both the industry and the producers. The the 1980s, McKinsey suggested an extension that added a dynamic element to a static framework. the dynamic version suggests that the relationships among structure, conduct and performance are not unidirectional; they flow in the opposite direction too. This approach allows companies to consider the influence of their own conduct on an industry's structure and ultimately, on their own performance. Many companies use the revised model to play through various scenarios that might affect them, to gain an understanding of what's happening in their industries and to develop their strategies." An interesting case study would be the present behaviour of the Airline industry in India that has just completed the first phase of consolidation.

Despite a reduction in ATF over the past four months, domestic airlines have not reduced the fuel surcharge of Rs 3100 per sector compared to Rs 1350 last November, even as the price of fuel has come down to Rs 39,767/kl from Rs 41,417/kl last November. That implies passengers are forking out nearly Rs 1750 more as fuel surcharge on every ticket despite government action to abolish customs duties and provide for extended credit period for payment of fuel bills.

Nov 2008

"India has the resources and expertise to tide over the global economic crisis and sustain 8 per cent growth...", said Manmohan Singh, our Prime Minister with the added caveat "...provided we have the imagination and will to work together". The BJP prime minister in-waiting LK Advani had other thoughts and said that "India" needs a strong leadership and a strong government, which has both the capacity to overcome the current crisis and also a clear vision to resolutely pursue long-term goals". While he may be right to an extent about the present government with regard to its profligate fiscal policies and the narrow view of its monetary policy response to inflation, the response to the crisis by a Congress-led UPA appears to be the lesser of the two evils.As the credit crisis continues its dance of death in the global financial system, Indian stock markets are back to where they began their heady climb three years ago. While oil has dipped to the $50 per barrel level, the rupee has depreciated to a level not seen in the past, now hovering around the $50 mark. Thus oil marketing companies are still bleeding even as the UPA government comes under increasing pressure to reduce retail prices in view of the upcoming parliamentary elections. At a time when a bipartisan approach is needed, the level of partisanship and regional chauvinism appears to be testing newer and more dangerous heights with players of all hues use brinkmanship to highlight caste, religious, linguistic or other difference to split the electorate.
There is heightening perception that rate cuts will not prevent India's corporate earnings growth from significantly cooling off. Confidence levels of companies about business prospects have declined with several companies resorting to lowering capacities and trimming staff in anticipation of lower demand. Even though the finance minister is confident of a return to 9% next year, market participants are not convinced, with a broader consensus being 6-7%. At this growth rate, the premium in share valuations which Indian companies have commanded in the recent bull-run could erode further. The global perception that emerging markets should trade in single-digit multiples could present some more downside risk to Indian equities. With the Sensex trading at 8.5 -9.0 times 2009-10 estimated earnings, though at higher valuations compared to other emerging economies makes it vulnerable to further downgrades as there is still a lack of clarity about the extent of the economic slowdown.
I have been using this newsletter to deal with macroeconomic and political factors of business performance. From this issue onward, I will begin to touch up the topic of Business Performance Management , our core area of expertise. I will be looking at performance management practices, frameworks, tools and software packages out there and the state of the art in management thinking with respect to the elements of business performance - strategy, structure, culture, process and systems. This week, I pick up on an article on the SCP framework in the McKinsey Quarterly that I read just earlier.The SCP (Structure-Conduct-Performance) model is an interest tool to analyze businesses striving to compete within a market[McKinsey Quarterly, Jul 2008]. "The model's original form depicts the influence of an industry's structure (for example, the growth of demand and barriers to entry) on the conduct of producers (pricing, for example) and the performance of both the industry and the producers. The the 1980s, McKinsey suggested an extension that added a dynamic element to a static framework. the dynamic version suggests that the relationships among structure, conduct and performance are not unidirectional; they flow in the opposite direction too. This approach allows companies to consider the influence of their own conduct on an industry's structure and ultimately, on their own performance. Many companies use the revised model to play through various scenarios that might affect them, to gain an understanding of what's happening in their industries and to develop their strategies." An interesting case study would be the present behaviour of the Airline industry in India that has just completed the first phase of consolidation.

As shown in the chart, despite a reduction in ATF over the past four months, domestic airlines have not reduced the fuel surcharge of Rs 3100 per sector compared to Rs 1350 last November, even as the price of fuel has come down to Rs 39,767/kl from Rs 41,417/kl last November. That implies passengers are forking out nearly Rs 1750 more as fuel surcharge on every ticket despite government action to abolish customs duties and provide for extended credit period for payment of fuel bills.

Credit crunch - first impact

Now there is method in the madness. The first semblances of a coordinated action by governments across Europe in the form of capital injection and guarantees has managed to stem a run on the banks and restore a level of confidence in the credit markets. However, the much dreaded 'R' word was doing the rounds more often. One commentator said that the number of times the finance minister appears on TV to assure the public and calm negative to near panic sentiments on the bourses is directly proportional to the seriousness of the trouble. Whether after the recent round of monetary policy changes, the FM chooses to appear less often is a moot question. However, the government and the monetary authority cannot absolve themselves of all blame. While the inflation numbers ballooned in the 1st and 2nd quarters of this fiscal, primarily due to external factors - commodity and oil prices, etc - the policy response was to treat inflation with a myopic view as if it were a local problem. Consecutive tightening in the monetary measures have directly, if not wholly, contributed to the liquidity problems facing the economy today. While a capitalist style layoff of 850 employees of Jet Airways hit the struggling airline industry with a promise of more to come, the company's management demonstrated a appalling lack of sensitivity and finesse in a country that is yet to get used to the flip side of capitalism. Not surprisingly, the matter quickly deteriorated into a Bollywood soap, with politicians of all hues joining the drama with sound bites that appeared directed more at building their constituencies for the upcoming elections than at the issues on hand. While Jet and Kingfisher have an axe to grind with the government on the likes of high tax rates for ATF, landing fees, development charges, usage charges et al, the blatant attempt to dramatize the issue was unnecessary and projected the private sector in a poor light. Talk of making profits a private right and losses a public liability. The need of the hour is continued engagement with all the stakeholders to ensure a key industry remains healthy and viable.

Nuclear Deal and Beyond

The deal is done. With a 86 of 99 possible votes in favour, the US Senate voted overwhelmingly for the US-India Nuclear Cooperation Approval and Non-proliferation Enhancement Act. The bill that will be signed into law by the US President in due course marks a significant change in Indo-US relations. Even in the absence of provisions like fuel supply guarantees and fuel stockpiles for the safeguarded reactors, it is a significant win for India. Besides opening of foreign direct investments in this sector and the entry of private firms into domestic nuclear energy programs, what the deal highlights, is a global recognition of the unique status of India in the world today.

As the mess in the US financial system spreads across the Atlantic, the reaction of European governments have been as swift and on an unprecedented scale as governments rushed in to prop up ailing financial institutions with huge cash injections or full-blown nationalization. Governments of the Benelux countries - Belgium, Netherlands and Luxembourg have agreed to inject $16.4 billion into Fortis - the first major euro zone bank to falter. In Germany, the $51.2 billion bailout of the No 2 commercial property lender Hypo Real Estate Holding narrowly escaped failure due to disagreement on their participation in the guarantees. In the UK, just a year after the collapse of the Northern Rock, the government has nationalized the assets of buy-to-let specialist Bradford and Bingley. In Ireland, government announced a $560 billion guarantee to cover deposits and debts of six biggest banks. And the bourses from the US to Japan have already caught a chill as the $700 billion US bailout package struggles through the hallways on Capitol Hill.At home, an outflow of 1700 crores by FIIs on the closing day of the week, sent the Sensex plunging 529 points to 12532 with Metals taking the hardest pounding with a drop of 7%.. Though inflation continued to hold at the +/- 12% levels, a strengthening dollar is offsetting the fall in oil prices and sending the OMCs into a tizzy. Oil and Gas Index lost nearly 6% while the consumer durables ended just over 4% in the negative.

The exit of Tata Motors Nano project from Singur in West Bengal brought the curtains down on a sorry political comedy that played out over several months with the TMC pitted against the CPM in what could only be a short-sighted struggle for relevance. Besides putting the company's 1500 crore investment at risk, the decision also affects hundreds of auto ancillary units that would have to relocate along with the mother plant.How can companies guard against such setbacks? What can be done to manage growth and profitability in the backdrop of so much of uncertainty? Can the management team in corporate houses do more to stabilize performance through graded response to macroeconomic developments? There are many who are of the opionion that the $700 billion bailout of the financial services sector seeks only to stabilize a business model that no longer meets the dynamics of the interconnected 21st century market where the flutter of a butterfly wing in one part of the world can spawn a hurricane in another.

We live in interesting times - change appears to be the only constant.

Black September!

Six events and counting – the developments in the Kashmir imbroglio, the tardy response to the Kosi disaster, the escalating communal riots in Orissa, the events in Singur, the acknowledged failure of the NREGS and the latest terrorist strikes in the heart of the capital - defined the past fortnight and put a question mark over India’s capability to develop a policy and governance framework that is both efficient and responsive to the complex and evolving needs of the nation.

On the positive side, the waiver obtained from the exclusive Nuclear Suppliers Group (NSG) was exceptional and as always, attributed to the tireless efforts of a few good men. The event did not go completely unopposed. Western editorials were quite scathing in their attack on India’s seemingly outrageous attempts to bypass the NPT regime stating that the ban on trade with countries that break the non-proliferation rules has been the chief underpinning of the NPT regime. However, the recognition by the current US government of the strategic alignment of common interests of the world’s oldest and largest democracies might still pave a bipartisan way for the 123 agreement through the US Congress.

The events in the global financial markets, specifically in the United States, has been unprecedented both in terms of the nature of the disaster and its magnitude. Lehman Brothers filed for bancruptcy, Merrill Lynch has agreed to be purchased by Bank of America, Bear Stearns has gone, Goldman Sachs and Morgan Stanley have been converted to retail commercial banks. With AIG and WaMu floundering and the bailout of Freddie Mac and Fannie Mae by the Fed, the financial market as we knew it ceased to exist. Once the full extent of the crisis unravels through bouts of deleveraging, someone will have the time to write an obituary to the business model that governed Wall St for more than half a century.

Not exactly the brightest September by a long shot!