Corporate managers must rise to the challenge

Countries have been pushed into wartime-like efforts to combat the coronavirus disease (Covid-19)-sparked crisis. The only parallel is the time when in the 1940s, large swathes of industry in the United States (US) were pressed into the production of goods required for the war. The current war against the virus has, by reopening debates about the deepening inequalities in society, raised the question of how companies, with their talents and efficiencies, can play a larger role in solving some of the challenges. The slew of economic reforms announced by the government provides an opportunity for Indian companies to now play such a role. Achieving this will require a paradigm shift in thinking across banks, company-owners and the government.

The government’s stimulus package has some broad themes. First, the government intends to revive micro, medium and small enterprises (MSMEs) through the provision of guarantees to ensure the flow of credit. It will also do so by releasing capital locked into the reverse repo with the Reserve Bank of India (RBI) or the cash reserve ratios with banks. However, transmitting unlocked reserves requires a different approach to risk-taking. Bankers will play a national role if they can, at least in the case of MSMEs who are existing borrowers, avoid total risk aversion, and encourage sensible lending that balances the need to keep jobs and consumption intact. After the depression, JM Keynes noted that when the facts change, economic theory must change. So too after Covid-19, lending practices must change to enable small business to recover.

In this connection fintech lenders have, since 2015, made deep inroads into precisely the types of businesses facing the maximum pain now. In the US, major fintech lenders have been eligible for direct Federal Reserve funds, which are fully guaranteed, as a means to help fund small businesses. If banks and non-banking financial companies were to refinance fintech platforms, this will speed up credit flow.

Large sums have been identified for investment through funds in the small and medium enterprises and agriculture space largely overseen by the Small Industries Development Bank of India. Here too conventional investment logic, which requires all projects to meet high hurdles for return, has less meaning when the more urgent need is to revive a stalled economy. There needs to be a clear acceptance that the multiplier effect of job creation, wages generation and demand can largely offset the impact of poor investment or lending.

The desire to reform and privatise agricultural procurement, coal, defence and power distribution is commendable. In doing so, it is important to put aside old hang-ups which include concerns about anti-competitive behaviour and corruption during bidding processes, which held back past reforms. In the light of the fears among officials by the 2G and coal scams, there has to be clear communication from the government that officers will be rewarded for bona fide, aggressive steps to bring about change. This is not to say that gross negligence or cases of corruption should be allowed to pass muster. While not denying the likelihood of these risks, economies do not come out of crises by playing safe.

A less noticeable-but-important change in approach is required of large shareholder investors. In assessing the returns they want from investments, they need to examine why when shareholders have done well in recent years, these increases in valuation have not touched other critical issues such as job creation, improving their green quotient or providing even two months of salary safety nets. In recent years, valuations of a few companies, especially in the technology sector, have left behind organisations which create high quality jobs, in the way General Motors (GM), Hilton or Unilever do. The desire for the market outperforming returns at all times has seemingly meant an unwillingness for investment in solid, useful, economy-enhancing plays, which pay 3-4% above the cost of capital but do not provide dramatic pay-offs. This is why, for example, in India, there is no market for a mortgage guarantee company, which would materially improve the quality of life. The institutional investing community may need to re-examine the lens through which it reviews its investments.

Last and most critical, the proposed reforms provide a chance for industry to rise to the occasion as their forbearers had done in the immediate post-Independence era. Large corporate houses, which drive most of industry, have the opportunity to pick up the gauntlet in several new areas where privatisation has been offered. There is a full alignment between meaningful risk taking and national reconstruction as demonstrated by groups such as the Tatas, whose investments in power, software, chemicals and other industries were, in their day, pioneering, even though they might have been seen as risky at the time. Many other Indian groups have similar stories involving entering unrelated areas and placing their best talent behind new projects.

Even with supportive mindsets from the groups above, successful national rebuilding will come by only if India’s large management pool relishes the opportunity to thrive under uncertainty and challenge. In the 1950’s Charlie Wilson, the CEO of GM said, “What is good for GM is good for America”. The opposite was also true. What is good for the country is also good for the individual company. As the government faces arguably the biggest challenge in India’s history, managers can play a greater part in the national response as some already do. Great managers are used to operating in difficult competitive environments. They will do a fantastic job of facilitating nationally meaningful outcomes such as job creation or privatisations of key industries without compromising on-long term returns if they are backed by their investors and promoters to do so. One hopes that the response to these bold reforms will be India’s World War II moment, after which the corporate sector applies its talent, financial muscle and risk appetite to the task of nation-building.