05 Jul 2018 20:53 IST

Leading a company or a nation — the long view

Whether heading a corporate or country, good leaders see long-term gains outweighing short-term pain

Corporate managers develop strategies to successfully steer companies and create value for shareholders, while the political leadership runs the nation, taking it through the path of reforms and economic growth. Several parallels can be drawn between these two processes.

While cultural and people issues often prevent managers from successfully creating shareholder value in companies, politics is the biggest hurdle for a nation’s leadership to progress on the growth path. Successful managers and national leadership steer through such ‘noise’ to deliver progress!

It is more than four years since the current BJP government has been in office and it will be going back to the people next year, hoping for a second-term mandate. Have the reforms initiated by this government been satisfactory and has it delivered enough progress to warrant a return to power?

Economic scorecard

The overall economy recorded growth from the first year of the BJP government’s rule; the gross domestic product, which was around 6.4 per cent during 2013-14, being the last year of the United Progressive Alliance (UPA) government, rose to around 7.4 per cent during 2014-15 and 8.2 per cent in 2015-16. Sceptics attributed such an increase in gross domestic product (GDP) to the method of capturing GDP, moving from the ‘factor cost’-based method to ‘market price’ method.

There is certainly some logic in such an argument; the change in methodology did matter. However, such change more or less aligns India’s GDP calculation criteria to the way many developed and developing economies calculate GDP. So, was the increased economic growth merely a result of change in GDP calculation methodology? Not really. The positive sentiments and sky-high expectations from the new dispensation also created a favourable environment for economic growth. Expectations ranged from sharp growth, deepening and strengthening of the manufacturing sector, employment creation, relief for farmers across rural India and bringing back black monies hoarded abroad. However, most of these expectations are yet to be met!

The first two years did evoke optimism all around and generated positive market sentiments. To add to it, the diplomacy of Modi’s overseas visits wove a certain magic in the way India was perceived across the globe; expectations among Indian voters were building up. Many foreign governments were bowled over by the prime minister’s diplomacy and initiatives — be it Make in India, Start-Up India, Swachch Bharath or the several town-hall type talks conducted across many cities in the world.

The flip side

In spite of all of the positive vibes, economic growth during 2016-17 and 2017-18 saw a significant dip, down to 7.1 per cent and 6.6 per cent. The note ban that suddenly came into effect on November 8, 2016 virtually shook the economy, causing disruption across layers of society, its impact lasting almost seven to eight months.

Demonetisation impacted GDP growth figures for 2016-17 significantly. Although the impact in terms of numbers does not seem so stark — from 8.2 per cent during the previous year to 7.1 per cent in 2016-17, the damage caused to citizens and industry were far-reaching and left a scar in the minds of people that may be difficult to erase.

The boldness the government demonstrated in implementing the same was lauded but, in parallel, the benefits that came out of such an exercise remain unexplained, almost two years since its implementation. Maybe this experience could go down in history as a good learning for any government that comes into power; albeit with an unprecedented mandate!

Biting the bullet

The introduction of GST happened during July 2017. There were short-term glitches in implementation that had a bearing on economic activity and this did further slow down growth during 2017-18. So should the Modi government have gone ahead and implemented GST? The answer is quite simple; governments, both past and present, did not really have a choice.

GST had to be implemented and the country’s complex indirect tax structure had to be simplified. Over the last 18 months GST and the system are surely and steadily getting stabilised. The government should be lauded for biting the bullet and completing an exercise pending for decades to align our tax practices with those of the global financial superpowers.

Serious reforms in the banking sector implemented by the government cannot be ignored. Amendment to the Banking Regulations Act 1949 and bringing the new Banking Regulations (Amend) Bill 2017, the involvement of the RBI and the National Company Law Tribunal (NCLT) and initiating proceedings under the Insolvency and Bankruptcy Code, 2016 are far-reaching reforms. They have the potential to address the stressed asset problems of banks, if followed through in a sustained manner.

Crude price hike, consequences

The fifth year of the current government is turning out to be challenging, especially with the increase in the global crude oil price, which remained quite benign over the last four years. This increase brings along with it a host of other complexities, such as inflation, interest rate hikes that could hamper economic growth, weakening of the currency and depletion of foreign reserves. More importantly, the increase in fuel prices at the pump will hit the common man hard!

The question is, does the current government have an impressive report card when it comes to reforms and growth that will bring it back to power in 2019? A million-dollar question, for which we may have no answer now! For sure, it’s well-known that winning elections in India is totally a different ball-game than offering good governance and strengthening the economy! Shrewd politics and good governance with significant reforms are not necessarily well-correlated!

Ease of doing business

Stock market sentiment is, however, quite interesting and has remained positive all through the last four years; possibly the market is intelligent enough to digest the ‘economic’ positives, filtering out the politics; though it could react negatively in the coming days as the global crude increase and its implications fully set in!

A number of other smaller, yet powerful, reforms were also put in place, and these have combined to steadily improve India’s ease of doing business from 134 to 100 over the last four years. Again, the benefits of all these reforms, the GST implementation and process for stressed assets resolution will have longer term-benefits and governments in subsequent terms will enjoy the fruits, while the short-term pain has been borne by the current government.

Well, whether in the corporate or the political arena, a good strategy is one that always takes a longer-term perspective in spite of the short-term pain-points, isn’t it?