India economic update
Milind S. KothariManaging Partner
M & A tracker
Rajesh ThakkarPartner & Leader/ Transaction Tax
Milind S. KothariManaging Partner
With the onslaught of the virus still unabated, India is facing the ignominy of claiming the third position globally for the highest number of infections. The re-opening of the economy is stretched as the first wave of the pandemic itself is not out of the way. Clearly, the lockdowns and ensuing disruptions indicate that a return to normalcy is likely to go beyond 2020.
In the wake of the economic impact, the government, led by the Prime Minister (PM), Mr Narendra Modi, is in overdrive to push urgent reforms and measures to kick start growth. The last of the stimulus packages announced a total relief of USD 265bn. However, lending to MSME, a lifeline for jobs for the masses, lagged significantly at 21% against the promised USD 40bn. For the rest of the categories, the stimulus that has been declared is also, work in progress. Surprisingly, the Chief Economic Adviser to the government, while assuring that another fiscal stimulus is in the offing, has kept the agenda on hold till such time as a vaccine becomes available. This may well take months which is likely to build up high levels of anxiety in the industry and business circles.
Continuing the momentum of reforms, the PM has extended an open invitation for investment in the Indian space sector to strengthen indigenous capacities in defence production. The government also took two bold steps i.e. opening up commercial coal mining and initiating operations of private trains on the Indian railways network; one of the last bastions of government monopoly in business. The government still manages nearly 250 public sector enterprises, not including a departmental undertaking like Indian Railways. While only a handful of them are profitable; there are several that are perennially loss-making and a drain on the public exchequer.
On this note, the Union cabinet is likely to soon consider a policy to start big-bang privatisation of public sector enterprises. It is planned that the government will make a complete exit from non-strategic sectors and also limit presence in strategic areas. The Department of Investment and Public Asset Management is working on designating various sectors as strategic or non-strategic. It is likely that banking, petroleum, atomic energy, defence, space, and ports would be part of the strategic list. Importantly, the government announced that there will be no more than four state-run companies in strategic sectors.
For the record, the Indian economy does not thrive on exports or tourism but on a large domestic market. However, the industry faces excess capacity and is therefore unwilling to invest but is critical to bring the growth momentum back. In the absence of private investment, it is the government that will need to step in and invest, which is not going to be easy. India is looking at a huge fiscal deficit, crippled by plunging tax collections. With nearly zero-interest rates prevailing in global financial markets, India will do well to borrow internationally. The blemish-free track record of not having a single external loan default should come in handy. Such borrowings can be cushioned, partly, by the size of foreign exchange reserve which fortunately is at an all-time high of over USD 517bn.
The Indian summer also got hotter due to a flare-up with the Chinese on the common border near the Galwan valley, in the Himalayas. As an economic defence to China’s aggression, the whole country is galvanised to marginalise the trade exposure with China. However, this may not seem easy as exports from India to China constitute non-essentials and while this may be a negligible amount of the total trade for China; it is the third-largest destination for Indian exports. On the other hand, for India, the imports from China are the highest and consist of a range of goods from consumer durables, automobile components to Active Pharmaceutical Ingredients (API) that constitute 70% of the industry requirement. A large-scale disruption in the trade with China can have a significant impact on the Indian economy.
One area of sunshine in this bleak economic scenario is the agriculture sector. Farm outputs have increased by 5.9% even as manufacturing dropped by 1.4%. The services sector that constitutes 55% of the GDP also took a hit. In June, the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance was promulgated. This will provide an overarching structure for regulating contract farming. The law is aimed at ensuring a closer interface between farmers and food processors and gradually initiating backward integration by big retailers to justify long-term investments for higher productivity and eliminating middlemen.
Factory output witnessed another sharp contraction at the end of the second quarter as restrictions put constraints on production capability. However, the rate of contraction has eased considerably from May onwards, signalling a weak recovery. On the trade front, the merchandise exports fell by over 12% while imports fell by nearly 47% and cumulatively, a trade surplus of USD 790 was reported, a first, after nearly 20 years.
With the country still in the throes of the pandemic; it is still early to predict the shape of economic recovery, although the government hopes it will be V-shaped. But for now, Indians have their hands full; coping with the health threat from COVID-19, and the economic challenges that follow close on its heels. Unfortunately, the journey promises to be long and arduous.
M&A in India
Between June 2020 to July 2020, around 83 M&A deals were announced of which 46 M&A deals were completed. The aggregate value of deals announced is USD 10,409.07mn; dominated by domestic deals (53) followed by cross border deals (30)
In terms of sectors (considering only closed deals), Industrials saw the maximum deal value, with deals worth USD 2,725mn, followed by Information Technology with deals worth USD 79.79mn and Consumer Discretionary with deals worth USD 43.5mn
Significant Deals completed between June 2020 to July 2020
Target Company: Lummus Technology
Acquiring Company: Haldia Petrochemicals Limited
Deal Value (in mn USD): 2,725
- Haldia Petrochemicals Limited and Rhone Capital jointly acquired Lummus Technology from McDermott International, Inc. for USD 2,725mn
- The proceeds would be used to repay debtor-in-possession financing as well as fund emergence costs besides providing cash to its balance sheet
- The acquisition would accelerate India’s progress towards self-reliance in the materials technology space and help Haldia Petrochemicals with technological improvements an initiative to pivot upstream investments in the oil to chemicals sector
- Post investment, Lummus Technology will function as an autonomous entity
Target Company: Prepladder Private Limited
Acquiring Company: Sorting Hat Technologies Private Limited
Deal Value (in mn USD): 50
- Sorting Hat Technologies Private Limited, owner of Edtech platform Unacademy acquired Prepladder Private Limited, a postgraduate medical entrance exam preparation platform, for USD 50mn in a cash and stock deal
- The acquisition highlights how ed-tech start-ups are favourites for investors in current times
- This move will strengthen Unacademy’s presence in medical entrance examination category such as NEET PG and FMGE
Target Company:Arvind Youth Brands Private Limited
Acquiring Company: Flipkart India Private Limited
Deal Value (in mn USD): 35
Sector: Consumer Discretionary
- Flipkart India Private Limited acquired a minority stake in Arvind Youth Brands Private Limited for USD 34.82mn from Arvind Fashions Private Limited
- Through this investment, the Flipkart Group and Arvind Fashions would work collaboratively to identify opportunities and synergies to innovate and develop products with strong value propositions at attractive price points
- The partnership with the Flipkart Group would help Arvind Fashions accelerate its online growth strategy as it focuses on developing an omnichannel retail approach for Arvind Youth Brands and Flying Machine
Significant deals announced between June 2020 to July 2020 but are not completed
Target Company: Jio Platforms Limited.
Acquiring Company: Google LLC
Deal Value (in mn USD): 4,496
Sector: Telecommunication Services
- Jio Platforms Limited is raising USD 4.45bn from Google LLC for a 7.73% stake
- The investment will build on Jio’s and Google’s existing efforts to expand the benefits of digitisation across the length and breadth of India, beyond the current 500+ million internet users in the country
- Jio Platforms and Google have also entered into a commercial agreement to jointly develop an entry-level affordable smartphone with optimisations to the Android operating system and the Play Store
- The transaction is subject to regulatory and other customary approvals
Target Company: Network Access Associates Limited
Acquiring Company: Bharti Global Limited
Deal Value (in mn USD): 1,000
Sector: Telecommunication Services
- A consortium of the UK Government and Bharti Global Limited entered into an agreement to acquire a 90% stake in Network Access Associates Limited for USD 1,000mn
- The proceeds will be used to acquire OneWeb and fund the full restart of its operations
- Post transaction, Bharti Global and the UK government will each hold 45% stake with existing creditors including SoftBank which will hold the remaining 10% stake of the company
- Bharti will provide the company commercial and operational leadership and bring OneWeb a revenue base to contribute towards its future success
- The transaction remains subject to approval by the U.S. Bankruptcy Court, as well as regulatory approvals and customary closing conditions and is expected to close by the fourth quarter of 2020
Work from Home – Will it emerge to be a conscious business choice?
Rewinding to the third weekend of March 2020; the spread of COVID-19 appeared to be on a serious ascent nation-wide and the situation seemed to be worsening rapidly. Expectedly, as most of us entered office the next week, it was imminent that we were headed for a shutdown almost immediately. There was serious concern that the highly contagious virus could infect and spread amongst employees who in turn could pass it on to their family members. Given the gravity and urgency of the situation, it was felt that ‘Work From Home’ (WFH) would be a safer option. But this also meant that most of us did not get any time to prepare to work from home as at that time it was commonly believed that the resumption of offices would be possible in a couple of weeks. On the contrary, in the week after, a national lockdown was announced that got extended and thereafter has been replaced by selective local lockdowns across the country. Nearly four months later, we are still working from home, without consciously realising how we gave credence and adapted to a new work culture, which most businesses wished to avoid before the pandemic.
Shaken by the insecurity, that the future was uncertain and bleak, everyone pulled together to minimise the impact on business. We, at BDO in India, focused on delivering to clients on time and surprisingly this was possible for most organisations, without too many glitches. It was also timely that significant preparation was already in place prior to the shutdown to experiment with a remote working model. While most feared loss of output as an immediate fall-out; in reality, the gains of increased productivity were clearly visible.
While WFH has not proved detrimental to delivering on business commitments for most organisations, what is astounding are the gains from a new-found team culture. This came as a sudden experiment that proved useful in accomplishing complex tasks that required intense deliberations involving multiple team members. Technologies such as Microsoft Teams, Zoom and Webex calls have become a way of life and even when we do return to a conventional work-life, the new-found team spirit is hopefully going to dominate work culture. Managing tasks and projects with collaborative tools and applications is bringing unprecedented gains in productivity. In hindsight, this part was squarely missing before the shutdown.
There was a general fear that WFH would lead to a dip in revenues when in fact it has actually turned out to be a saviour. The lower revenues are more on account of the massive economic fallout resulting from the lockdown that shut down industries and businesses alike.
It is a pleasant revelation that WFH is the new and efficient way to work. In all probability, it is here to stay even when the pandemic is over. Another development of WFH is technology overindulgence. Hence it is important to take necessary precautions to ensure that the data exchange between clients, servers and employees is secure. Investing in state-of-the-art cybersecurity systems is the need of the hour and is also confidence-inspiring for clients.
While restrictions have been eased and offices have resumed partly in compliance with health and safety guidelines issued, there is a general hesitation in physically going to offices; a challenge exacerbated due to dependency on public transport. It is general belief that resumption of public transport is risky and bound to become a propeller of the virus in no time. Given this limitation, it is likely that WFH may continue past 2020 and well into 2021. It would be interesting to know what the future of work and offices will be. Clearly, full workdays spent in offices may become a thing of the past. As is being said and experienced; change has been swift and what would have taken years, has been achieved in weeks.
Reinventing work culture - Taking business home
As high as 88% of the workforce in India prefers to have the flexibility of working from home and 69% believe their productivity has increased working remotely, as per a survey by SAP Concur, an expense management firm. The percentage in India saying productivity has increased is the highest in the APAC region.
Google has now extended work from home (WFH) for most of their employees till June 2021, and many organisations are looking to provide this extended flexibility to their employees based on their roles and requirement. The single most important lesson that corporate India learnt during the recent nationwide lockdown was that work from home is not just a possibility but is here to stay.
While WFH is a boon for many employees, it does require employers to consider several aspects, to ensure a smooth transition into the new world. To begin with:
Infrastructure: Organisations that are looking to extend WFH in the future must have the right infrastructure, to ensure collaboration in the virtual workspace. Organisations that had cloud computing and other online video platforms already as part of their IT infrastructure found it easier to transition to a 100% virtual environment. Broadband allowance and access to high-quality broadband service for employees could be the first few to consider.
Culture: WFH requires a big shift in the way an organisation works. The first step towards a culture shift - the tone must be set at the top. The leadership must enable the organisation in re-orienting towards a Result Only Work Environment (ROWE).
With work extending into the personal space of employees, it is important that employers work toward being more inclusive; research has proven that employees are more productive when they are able to bring their authentic self to work. Creating a culture of accountability is easier said than done especially for organisations whose work culture is deep-rooted in valuing number of working hours or in and out time at office. Managers will have to build the capability of co-creating work goals that are not only clear but meaningful for their team members. There will have to be extra emphasis on communicating and staying connected with teams, whilst supporting employees in building work life harmony.
Clear Communication: Employees will be operating in a virtual environment with most of the communication happening via virtual platforms. This requires clarity in communication, leveraging all channels available to an employee, frequent townhalls and all-hands meetings to rally your teams. We not only have to ensure managers are trained in managing a workforce virtually, but they must also be made aware of their unconscious biases. For example – how do you conduct a meeting where 50% of your team is in office and the other 50% at home, it is only fair that everyone logs through a digital platform ensuring everyone is heard in the meeting. You do not want to lose that important input from an employee who is shy to interrupt.
Attract, Retain and Develop: Working from home is not just a choice, it requires skills, hence it’s essential we enable our employees to develop those and at the same time hire resources with relevant skills like – communicative, collaborative, self-motivated, self-disciplined etc. New world managers will need to manage partial or 100% work from home and this can be a new challenge for managers who have always managed in-person. Employees build a sense of belongingness in their physical workspaces; in a contactless world, employee experiences will get re-prioritised driving employers to personalise employee experiences and move towards individual value proposition over employee value proposition.
Reward and Recognition: WFH is now a choice most men are willing to make which can only mean more women at work, as their spouses get ready to take more responsibility at home. ROWE culture supports equal pay, as outcomes take front seat instead of physical proximity to work. This is also a chance for employers to re-imagine their career progression policies, as employees prepare to work from anywhere.
Re-design: Customer experience is the most critical component in the success of an organisation. With a dispersed and virtual workforce, it is imperative to re-emphasise on this, and re-design recognition programs to appreciate the most crucial behaviours expected from employees – work ethics and values. While some may argue this should be a given, still failure to recognise these behaviours will weaken the very foundation of organisational values and beliefs in the new world.
“We hear you and we care for you”: Organisations will have to give equal focus on building both speaking and listening channels creating two way communication between leaders and employees, a lack of which will mean a broken channel, resulting in low employee engagement and poor results. Employers have begun to accept mindfulness as key to productivity and are stressing on wellness initiatives like - be kind to your mind, or burn out breaks, to ensure social, mental and physical wellness of their employees. This is a new phase for employees, where the thin line between their professional and personal lives are blurring and organisations have a key role to play in easing them into this new way of working without compromising on their well-being. Authenticity and human forward will become the basic tenets of the new world of work.
Employers will have to revisit old-world policies as they prepare themselves to embrace new ways of work such as flexible work options based on the need of the employees, providing access to high-quality broadband and ergonomic furniture at home for employees for creating home offices. In the light of data privacy laws only becoming stricter in the country, it is imperative to construct strict guidelines around this as employees look forward to working from home.
Finally, successful implementation of work from home culture requires that leadership builds its people strategy on the strong foundation of care, empathy and compassion.