India enters a VUCA world
Report | June 2016 | Kanvic Grey Matter
The volatility and uncertainty of the last five years are the ‘new normal’ for India Inc.
Over the last 5 years India has become increasingly subject to the convulsions of an erratic global economy, while at the same time the domestic environment has become more challenging. The Economic Survey of India 2016 stated that “the newest normal for the world economy is one of turbulence and volatility”.
India Inc. had come to expect GDP growth rates of 9% and above as the norm but the global financial crisis precipitated a drop in growth from close to 10% to less than 6%. However, a subsequent fiscal stimulus from the Indian government resulted in a strong rebound that saw growth exceed its pre-crisis levels. Unfortunately this bounce was short-lived as industrial growth quickly began to weaken, and GDP growth has been unable to break much above 7% in the years since. The volatility in GDP growth has impacted aggregate demand, which in turn has created excess capacity and put downward pressure on margins in many industries.
Compounding the challenge of GDP volatility is the unprecedented volatility in commodity prices, and the consequent feed through to input prices for many Indian businesses. In a short few years commodity prices have swung between record highs and lows, as the commodity super-cycle was quickly followed by fears of a Chinese slowdown.
Inflation has seen similarly sharp ups and downs with significant implications for consumer demand. With food staples still accounting for a large share of Indian household expenditure, any price change is greatly amplified. While inflation has moderated recently thanks to lower commodity prices, a sudden rise in fuel costs or a disappointing monsoon could easily see the figure leap again.
On top of this, exchange rate volatility is a further challenge for Indian business. The fluctuation in the Rupee’s value (signified by the standard deviation of the INR USD rate) was more than twice as extreme between 2010 and 2015 as it had been in the preceding 5 years2. As a net importer in many important commodities India Inc. is acutely vulnerable to such swings.
As well as a more volatile environment, Indian business has to contend with uncertainty surrounding the annual Monsoon. The majority of India's population still rely on agriculture as a source of income and the country's farms are highly reliant on a favourable Monsoon. The Monsoon’s impact on rural consumption has major consequences every year for the fortunes of India Inc. This uncertainty is further exacerbated as weather patterns are becoming more unpredictable due to global warming and other climactic forces.
Today, volatility and uncertainty in the global economy have greater influence on the Indian economy than ever before, creating a more complex environment for business to navigate. In the first decade post-liberalisation India remained relatively insulated from the global economy. But since 2002 the correlation between India’s growth rate and that of the global economy has more than doubled from 0.2 to 0.423.
India’s closer integration is reflected in increasing cross border flows of trade and its rising share of global trade. Trends in cross border foreign direct investment (FDI) and foreign institutional investment (FII) have also seen increases over this period4.
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