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No time for Big Hairy Audacious Goals yet?

LiveMint logoLiveMint 15-06-2014 Amay Hattangadi

BHAG which stands for Big Hairy Audacious Goals is a term coined in the 1990s by Jim Collins in his book titled Built to Last: Successful Habits of Visionary Companies. The idea is to have what might initially seem as outrageously ambitious long-term goals so that companies try to do something beyond the ordinary. BHAGs could be quantitative such as achieving a particular target turnover over the next five or 10 years. They could be qualitative such as Ford Motor’s vision of the 1900s that read “democratize the automobile”. Statements made by a former chief minister of Maharashtra to convert Mumbai into Shanghai fall under the category of “role-model BHAGs”.

The underlying message is that if companies want to go beyond their comfort zone and achieve extraordinary results, they need to think big. What applies to companies could be extended to countries as well. Myopic, stop-gap policies and incrementalist budgets do not put a country on a sustainable growth map. The need for India to have BHAGs cannot be over-emphasized, but the question is whether it should be an immediate priority of the new government?

In this context, the top 10 priorities unveiled a few days ago by the new government is instructive. A cursory look at these top 10 priorities throws up one interesting observation. There are no BHAGs. And that is possibly what the country needs at this hour. Some of these top 10 priorities read like—improving inter-ministerial coordination, building confidence in the bureaucracy and maintaining consistency in policy. No big vision statements such as increasing investment-to-gross domestic product (GDP) ratio by 5%, or building a target kilometres of new highways every day or raising the GDP growth target to 8%.

In fact, it may actually be the apt prescription in the current scenario. An important contributor to the GDP slowdown has been lower capital productivity, as measured by ICOR (Incremental Capital Output Ratio). Simply put, ICOR denotes the incremental amount of capital required to generate an incremental unit of output. Thus a higher ICOR denotes falling capital productivity. Investment-to-GDP ratio, which peaked at about 36% in the fiscal year 2007-08, has fallen to an estimated 31% in 2013-14. While the slowdown in investment ratio is worrying, the absolute number itself still compares favourably with India’s peer set of other emerging markets. But when read in conjunction with the real GDP growth number, the picture becomes more worrying. Over the same period, India’s real GDP growth almost halved from 9.3% to 4.7%, which means that it now required 6.5 units of capital (ICOR) to generate one unit of output or GDP while we were making do with just 3.8 units for the same incremental output in 2007-08. If capital productivity had remained constant at an ICOR of 4x, India’s GDP growth would have looked much better at 7.5%, falling only in line with the fall in investment-to-GDP ratio. Intuitively, this would be puzzling in a capital-scarce country such as India.

A comparison of ICOR levels of India and China is quite revealing. Ironically the ICOR levels of both countries have deteriorated over the last seven years. In 2005-2007, the ICOR levels of both economies were almost on par at about 3.5 times. This number has now deteriorated for both economies to above six times. Anecdotally, China has sparkling new steel plants that are running at sub-par utilization levels and eight-lane expressways with low traffic. India, on the other hand, has power plants waiting for fuel and unfinished national highways. The net result for both nations is deterioration in the level of capital efficiency. While China may have to focus on increasing consumption and exports to better utilize its capacity, India needs to remove the bottlenecks to commission what has for an inordinately long time been lying in the books as “Capital Work in Progress”. Data from Centre for Monitoring Indian Economy show the number of projects under implementation has ballooned from about 40% of GDP to over 80% in last few years. In that backdrop, the government’s goal of “better inter-ministerial co-ordination” may sound underwhelming but could have far-reaching implications. Clubbing together ministries overseeing related areas is also a welcome step in that direction as it will likely help “unclogging the pipes”.

As investors, we focus on profitability and capital efficiency for companies as measured by asset turns, operating cash flows and return on equity. Most often, these are more important contributors to premium valuations than just revenue growth. The same applies at the macro level as well. If India’s macro balance sheet gets unclogged, headline GDP growth will follow.

In a recent TV show, Virender Sehwag narrated an incident that occurred during his famous Test innings against Pakistan at Multan. After he had hit a blitz of five sixes in the early part of his innings, Tendulkar admonished him and asked him to focus on batting calmly as the team required a big partnership. From the team score of 191 till 486, Sehwag did not hit a single six but played more conventional cricket. Fans remember the crowning glory of the triple hundred that he brought in with a six, but the ones and two were the real unsung contributors in that mammoth effort. India is at that juncture now—we need to focus on doing the basic stuff right and hopefully the towering sixes will come later.

Amay Hattangadi and Swanand Kelkar are portfolio managers with Morgan Stanley Investment Management.These are their personal views.

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