The Covid-19 crisis has highlighted the weaknesses and strengths of the country’s large businesses, forcing top executives and CEOs to rejig their business to navigate through the downturn and position them for long-term success.
Rajat Dhawan, McKinsey’s Senior Partner and leader of advanced industries practice, puts together a perspective on the way forward for businesses as perceived by the CEOs of companies.
The pandemic has had a serious effect on the lives and livelihoods of people in the country, and the lockdown measures imposed in March have curtailed economic activity and increased unemployment.
GDP to shrink
While McKinsey estimates that India’s GDP in the first quarter of FY21 could shrink by 20 per cent, compared with the same quarter last year, the World Bank projects that full-year GDP will contract by more than 3 per cent. India’s unemployment rate, which stood at 8.4 per cent before the lockdown, rose to 27.1 per cent in April.
In this backdrop, the consultancy firm looked at the implications for business and ‘reimagining the office and work life after Covid-19.’
Following discussions with dozens of CEOs and senior executives in recent weeks, the executives say they are planning for a prolonged economic downturn and for an uncertain ‘next normal’ that could follow an eventual recovery. The crisis has brought new urgency to some of corporate India’s longstanding challenges.
The beginning of May saw the government cautiously lift certain restrictions so that some businesses could reopen. This helped bring the unemployment rate down to 24 per cent by mid-May.
And when McKinsey surveyed global executives on their economic views in May, almost half of respondents in India said they expect economic conditions in India to be substantially or moderately better in six months.
But CEOs are re-thinking their priorities. These include making balance sheets and cost structures more resilient, reshaping business portfolios, embedding digital analytics, and working towards greater safety and flexibility in production and operations.
Dual pressure
The crisis has knocked their companies back to revenue levels of three to five years ago in many cases. The dual pressure of falling revenues and diminished ability to service debt has weakened balance sheets. So, the focus now is on making balance sheets and cost structures more resilient.
Equity financing stands out as their best option for executives. Some $50 billion of foreign direct investment (FDI) equity flowed into India during the year that ended in March 2020, and several high-profile FDI investments have been announced in the past six weeks. Strategic partnerships could shore up their balance sheets.
Efforts are on to reshaping business portfolios for value creation. Of India’s $1.1 trillion of invested capital over the last decade, the lion’s share of 84 per cent is concentrated in three value-losing sectors: energy and materials (37 per cent), domestic services (30 per cent), and financial services (17 per cent). Only 16 per cent of invested capital went into value-creating sectors such as knowledge-intensive sectors (IT, pharmaceuticals, medical products), consumer goods and services, and capital goods.
The area of focus is embedding digital and analytics to transform legacy businesses and build new ones. The CEOs are keen to digitise sales and customer experiences in both the business-to-consumer context and the business-to-business context.
Alongside, there is an effort to building greater safety, flexibility, and productivity into operations, as executives worry that a continual start-stop cycle could define the remainder of 2020. In addition, there is effort to embrace systems thinking in corporate decisions.