India’s Pramath Sinha on business – extended remix

Pramath Sinha, the founder and managing director of 9.9 Mediaworx, played agony aunt to the Indian government and the country's largest companies for 12 years as a partner at McKinsey & Co. GlobalPost's senior correspondent for India, Jason Overdorf, quizzed him about the current business climate.

(This is the uncut transcript of the interview that appeared in the Suite Spot yesterday).

JO: We keep hearing that India's economic reforms have stalled, the government is paralyzed, inflation is out of control. Do these negative signals mean the shine has come off the India story?

PS: I'm just coming out of a discussion on this. I'm actually quite pessimistic, but some of the people I was talking to are less pessimistic. I'll give you what I'm reconsidering as my own view. The fact is that we are going to be looking at a period that is going to be full of uncertainty and therefore a lack of hard decisions getting made and therefore any extraordinary growth beyond what we are getting now is not going to be unlocked. We are looking at economic growth in the 6 percent range now, when only a few months ago, being bullish, we were looking in the 9-plus range. We are slowing down, and we will continue to peter out. But the truth is that we've become a large enough economy that it's hard to slow us down completely. At the size we are, a 6 or 6.5 percent growth rate is not insignificant. Whatever the government is doing, at whatever pace they may be building roads or building infrastructure – it always seems one step forward and two steps back – I think at some level there is enough juice in this country to keep us growing at 4, 5, 6 percent, and that in itself will not be so bad. It's obviously disappointing given our potential. The potential could easily be 10 percent. As a CEO I feel sad that we are underperforming against our potential, and frankly this was a solvable problem. It's not somethign that is that far out of our reach, and we are frittering away that advantage. Some of this lost growth is a real lost opportunity, becasue it just takes that much longer then to advance as a country.

JO: What, then, are the biggest threats to the India story? Are they solvable problems?

PS: The lack of governance is today the biggest threat. I think there's a real crisis in the leadership in this country, and the challenge is that it's spread across all parties, or at least the two principal parties. What has happened is that our politics has become very fragmented and very regionalized, so a Mamata Banerjee [of West Bengal's Trinamool Congress Party] with her small group of MPs can call the shots, a Mayawati [of Uttar Pradesh's Bahujan Samaj Party] with one state can call the shots. That's one big trend. The other big trend is that the largest two parties, which always have to be somewhere involved in the leadership of the country, the [Bharatiya Janata Party] (BJP) and the Congress, are both facing a crisis of succession. It's clear that the current set of leaders can't pull them through, and it's not clear who will be the next leader, adn therefore everybody is trying to jockey to be the next leader and pull each other down to size. So there's confusion in their leadership, there's fragmentation in politics, so unless one of these large parties gets their act together, managing coalitions and managing their own pulls and tugs is going to impact decision-making, policy-making and the continued reforms we need in this country. That's the crisis you're seeing right now, and although the answers of what needs to be done in sector after sector to attract investment and drive growth is known and understood, there isn't any real push or leadershp on these things, so we lurch from crisis to crisis, and in each of these crises the government seems to be helpless and is always blaming someone else. That to me is the biggest risk – the lack of leadership and governance at the top, to drive change. It's always difficult. If you look at what we've done in the last 20 years, Narasinha Rao, who doesn't get much credit, and the BJP under [Atal Behari] Vajpayee provided strong leadership. We've not had that kind of leadership, and therefore governance, for the last few eyars, and that's what's causing this.

JO: Anything else?

PS: The other piece is that we are a bit muddled around certain policies. I personally see the whole issue around education as a big travesty. All the numbers, all the demographic trends, are extremely favorable…. But here again we are frittering away that advantage by not allowing our people to get properly educated, whether at the primary, secondary or higher levels. And these again are solved problems around the world. We are still muddling about how we should regulate education, which is silly. This is not some new industry like the Internet where we have to figure out privacy and security and how government will react. Education is education, nothing has changed in that sector for 100 years now. Why do we not know how to create a vibrant education sector in this country, when there is so much demand, both from students and potential employers, just baffles me. Some of these things are areas where we really need to apply our minds and say “why do we even need to think about this, let's just go out and make it happen.”

PS: Also, this mantra of inclusive growth [introduced by the Congress party] is a good tagline, but it really does point out that our biggest challenge is inclusion, and despite the supposed progress that we've made on the average growth, or quality of our economy, the disparities have grown. We have to worry about that when the disparities are at the scale at which we are. The numbers of people who are still poor, who are still dying, who are still malnourished, who are still not getting an education are staggering. It almost requires a new business model, or a new economic model, or a new development model. We've given it the name of inclusive growth, but I don't think we've figured out the answers. I see this as a big threat becuase certain areas of the coutnry are still getting left behind. I think if you look at what is happening with the Maoist movement, it's telling that it's happening in that half of the country. Economists always draw a diagonal line from the northwest to the southeast, saying this is the part of the country that is in the dark ages, where it's like sub-Saharan Africa, and this is where we have the Maoist problem. I know some of the police officers who are involved in the security of those regions. There's a war going on there, and we don't even hear about it. We hear about [Priyanka Gandhi's husband] Robert Vadra's election campaign and we hear about Baby Falak, and there are body bags coming out of the Northeast, right from Chhattisgarh to Bihar to Uttar Pradesh every day. Every day people are counting how many dead, and we don't even recognize it. That is the other big challenge.

JO: How about we look on the bright side: Given all these challenges, and the various negative economic signals, what are some of the business opportunities that remain exciting?

PS: The whole economy is really being driven by private [domestic] consumption, and that's one of the thing that's really resilient and has really protected us from shocks in teh past. Anything that feeds on teh consumption boom and further fuels that boom, whether products or services, are all opportunities. So I think retail, food, education, health, all these essential services, are going to be tremendous. Everything that feeds into the day-to-day needs of people, there's still a huge market for that, and we will continue to be a growing market, and one of the largest markets, for a long time. But investors will have to be patient. The venture capital firm that invests in my company calls it “patience capital.” Whether you're in business or an investor in India, you have to have patient capital. So I think you will grow, you will have opportunities, but you have to be prepared. The rules of the game will change, as they just have for telecom investors in India [with the Supreme Court decision to revoke 122 telecom licenses tainted by a corruption scandal], policies will not move quickly, local companies will provide unfair competition. All of those challenges will happen. It's a tough market. From that angle, while the opporutnity is there, it's not a slam dunk opportunity in any one sector.

JO: Does that mean India is a more viable target for the big multinationals, with deep pockets and a long investment horizon? Or are there good opportunities for small and medium-sized enterprises as well?

PS: I think there's a vibrant opportunity for small and medium enterprises also. In fact, I think that it somewhere may lend itself to small and medium enterprises because large multinationals always have a problem scaling up in India. Sizes of the individual makrets are still relatively small. So large multinationals come in and expect India to be huge and deliver hockey stick growth. Then it doesn't happen, and then they get disappointed. Their executives get beaten up, they start comparing to China, and they say it's not worth it. To some extent I think this is a better market for the small and medium-sized, because for them it's just easier in terms of scale, and their energy and drive, to get stuff done.

JO: In your experience with McKinsey, what were the most common misconceptions you confronted with other CEOs?

PS: The most common misconception was that people came into India with a certain business model or a certain product and assumed they could just sell it and people here were jsut waiting to buy it from them. They did not realize or understand taht our buyers and our consumers are quite distinct in their own right and don't settle for a prepakcaged pushed through in this new market. They just assumed that they had the best thing since sliced bread, and if people around the world were buying it, why wouldn't Indians buy it, too. Most people have had to realize that your strategy has to be India out. What I mean by that is you have to take an approach that says: “How do I customize my entire model, right from the product to my business system, to the Indian context?” Of course you bring in best practices, you bring in your core technology, or your distinctiveness. But how do you make sure that you are sufficiently adapted to the local context? That to me has been the biggest learning. The fact is that it's easier to take your product from the United States to Latin America or Russia or Hungary than it is to bring it to India. The second thing is that people underestimated teh quality of local competition. Often, people didn't realize that there were very strong and vibrant Indian companies that would give them a run for their money. In all kinds of sectors. If you think about it, a Vodafone or an AT&T or a Verizon, when they first came to India, they didn't anticipate that a Reliance or a Bharti would give them such a big run for their money. Or an airline [such as AirAsia] didn't expect that an airline like Jet Airways or an Indigo would give them so much competition. So if you look at retail, it's not clear that you need a Walmart, because it's not clear that one of these guys, Reliance or Bharti, is not doing a great job already. In a lot of these emerging markets, when MNCs come in, they have an easy time.

JO: Speaking of Vodafone and Reliance, what signals do you read in the recent Supreme Court judgements to set aside the government's tax claims related to Vodafone's acquisition of Hutch and to cancel 122 telecom licenses associated with the 2G telecom spectrum scandal?

PS: I think the trend in general is good. The good thing is that the legal system has invested and done a good, considered judgement. Both these judgements show that there is a strong, thinking, legal resource that's independent from the government. You may not agree with all aspects of the judgements, but people always talk about the sanctity of our judicial system and both these cases have affirmed that. That's the good news. The bad news is that they showed that the government doesn't know what it's doing. The courts are basically saying, “Hey guys, follow the rules. You make the rules. Why are you not following the rules.” The rules in this country say that if you make a transaction offshore, the government can't tax it. That's the rule. If you don't liek the rule, change it. You can't be selective about it. That's essentially what happened in the 2G scam as well. The rules were essentially that you have to allot licenses by first-come, first-served. But then you start subverting the first-come, first-served to get some people to be first instead of second. You're subverting your own rules. These judgements are very fair. They're saying, you have a policy, stick to the policy.

JO: You're in the media business these days, which is booming in India even though it's not doing very well around the world. Do you just think there's time left on the clock here, or can Indian media companies defy the odds and continue to succeed in the sector?

PS: India is doing well in that sector. If you look at the underpenetration of media and the underpenetration of advertising, we actually have a long way to go. We are actually not struck by some of the ills that have hit media in the rest of the world, because in the rest of the world they had such a large built up legacy that moving over to this new world of online basically wiped out the existing business. In India we have the luxury of time, becasue we have both the old meida and new media flourishing. That gives us a much longer runway to shift over from one to the other. The challenge in India is a different one for media. That is we have palyers who are not economically rational. You have a lot of players in India who are not in media for money, but for power and influence. They are not looking for economic value creation, and they are not looking for rational behavior in terms of pricing and so on. You have television channels owned by politicians or influential people. They don't care what they charge people. Because of that, the prices for legitimate players are set so low that people just can't make money anymore. That just ruins the industry. I hope over time it will get sorted out. Long term there's very good potential for us to grow.