Last Updated : Sep 28, 2016 07:23 PM IST | Source: CNBC-TV18

Investors upbeat over India's reforms push: BCG

Macroeconomic conditions across countries are not great and nations need real reforms to spur investor confidence, BCG Chief Executive Richard Lesser told CNBC-TV18. He, however, added that investors across the globe have a lot of confidence that such crucial reforms have started in India.

Boston Consulting Group has is extremely positive about India which is evident from the fact that the group placed the country at the Numero Uno spot in its Top 50 Innovators list for 2015.

Macroenomic conditions across countries are not great and nations need real reforms to spur investor confidence, BCG Chief Executive Richard Lesser told CNBC-TV18. He, however, added that investors across the globe have a lot of confidence that such crucial reforms have started in India. They believe that there is a sincere effort by the Indian authorities to push reforms, he said.

Lesser asserted that the passage of Goods and Services Tax was a major step in the country's reforms push. He said investors understand the theoretical potential of India. 

Lesser, further said, India is on the right track for growth, but the journey will be a long and winding one.

Among the sectors BCG is positive about banks and IT. BCG India Managing Director Neeraj Aggarwal said private banks are better positioned the public sector banks. He added that technology is a huge opportunity due to the latent capital available. Indian companies like Infosys and TCS make it to the BCG's list of emerging companies.

Indian IT industry is at an inflection point and they're creating islands of change within themselves, he Aggarwal said.

During the US Presidential debate, Donald Trump made references to China, Mexico and other emerging markets draining jobs from the US. Lesser said the protection rhetoric in the US and UK is a matter of concern.

Below is the verbatim transcript of Richard Lesser and Neeraj Aggarwal’s interview to Shereen Bhan on CNBC-TV18.

Q: Congratulations on turning 20 here in India?

Lesser: We are really excited about it. It has been really a great journey and terrific team and actually looking forward with tremendous amount of optimism to the years ahead.

Q: So, let me start by asking you about what gives you confidence about India today? BCG in a sense has been involved with post liberalisation story in India. Today India relatively is outperforming the rest of the world if it comes to economic growth. When you talk about foreign direct investment (FDI) but what really gives you confidence that this is sustainable?

Lesser: The real challenge for governments around the world right now is the ability to take on real reform. So many governments, it is not just in India, face these immense internal blocks at a time when there is real challenges, there is new technology, there is challenging global environment the macroeconomics aren't great and the real opportunity for countries around the world is to be able to take on real reform that encourages investment, build human capital.

Q: Has India done that in the past two years?

Lesser: It is a huge country. It is not easy to change overnight. So, when you say has it done that. No, of course, it is not done yet. But there is a lot of confidence when I talk to leaders in India and around the world that A: the journey has started, the important things like Goods and Services Tax (GST) and a number of the ministries, the real reform has started and that there seems to be a sincere committeemen to push it further and also the capacity to push it further recognising India like every country as a complex place, it doesn't happen overnight and it doesn't happen easily and there is probably honestly there is much confidence about India's ability to continue to make progress with the current leadership team that is in place as there is probably anywhere in the world.

Q: So, what will that mean then when we talk about FDI because FDI has come back strongly. We have seen a dip in the previous quarter year-on-year (Y-o-Y) but that could perhaps be an aberration. When you talk to global clients what are they telling you about the strength of the India story and their capacity to continue to invest here?

Lesser: Everybody understands the theoretical potential of India. A population of over one billion people, young population with growing strong education in much of the workforce, the capacity of India is well understood. The challenge has been all the blockers in India, the difficulty of doing business, the multiple layers of government to navigate corruption challenges.

Q: So, do they tell you things have improved?

Lesser: They say they are seeing improvement occurring not that we are done but A: they believe in the sincerity and commitment of the government to produce reforms and B: there are signs, there is progress and there is progress in different areas, we have had the privilege of working in the ports area and we enormous progress on what is happening in ports and productivity in ports, around the financial performance of ports, the GST was a big battle over many years to get approved, it still needs to get implemented, just because you have it approved there is a lot of work still to do but that was a major step forward. So, there is optimism that India is on the right journey, but it is a winding journey and there is a lot still to do.

Q: I have been looking at the data that BCG has put together and if I look at what your data shows in terms of global value creators and I am just going to talk about a few sectors, automotive you have Eicher Motors right at the top here and this of course you have mapped data between 2011 and 2015. Incidentally Eicher Motors today has had a pretty big day because its market cap has crossed that of Hero Moto. In fact even in your global value creators for banking, you have got Kotak Mahindra Bank coming at number one and another Indian bank that is HDFC Bank at number two. So, if I were to ask you about sectors that you feel most confident about, what would those be?

Aggarwal: The clients you named or the corporates you named, the reason they have got the multiples they have got or the market cap they have got is because they are built on a foundation of very strong performance, the fundamentals are strong, future looks robust and the growth trajectory is out there.

If you look at sectors across the board I would break it into four kind of sectors, if you take financial services I think the opportunity is huge, the need is huge. Private sector banks are in a good place. The public sector banks are in bit of a difficult spot with the NPAs and human capital challenges.

Q: Do you believe things have improved on the NPL front? That is the sense that we are now getting from analysts?

Aggarwal: The discussions that I have had indicate that we perhaps have seen the bottom and we are on the upper side of the trajectory. All the consumer industries, I think the consumer demand is strong. There is more premiumization happening, more people coming out of smaller income to the higher income category. The tier IV towns are growing faster in consumption than the tier I or the metros. Digital consumption is going up. There are more independent families than ever before, so the wave of consumption is changing but it is certainly rising. All consumer facing industries have huge opportunities. Technology is the other area I believe India has as huge opportunity because of the latent capital or the technology capital it has built. So, to leapfrog within India and broader, there is huge opportunity.

Q: I just want to pick on technology because if I look at your emerging challenges list then the Indian companies on BCGs 2016 list include a bunch of technology companies, you have got Infosys, you have Tech Mahindra, Wipro, TCS in the leaders and graduates category. Most people at this point in time seem to have concerns about the capacity of Indian IT to make the switch now - moving away from legacy to cloud for instance and that seems to be reflected at least if one goes by the stock performance. You continue to be confident that Indian IT is going to be able to transition and make that leap?

Aggarwal: IT industry in general is at very big inflection point. There are some trends which are changing in a very major way. The big bulge IT deals are not going to happen anymore. At the same time the world is changing in a very fundamental way. Almost everything is becoming software. If you talk to Jeff Immelt, he says we are a software company.

If you take a car, a Tesla car doesn't have thousand moving parts, it has 18 moving parts and it is generating tons and tons of data. So, everything is becoming data centric. The capability that Indian IT firms have to deal with data, to work with data is humongous. So, I think the market will expand but the thing they have to watch out for is they should not become like the incumbents. They have to innovate faster otherwise somebody else is going to come and eat their lunch.

Q: But have you started to see them pivot?

Aggarwal: There is a lot of talk across the board. But when you are a USD 8-10 billion company moving fast on a certain trajectory, moving a big tanker one way to the other is a tough act. So, what they are trying to do is create islands of change within them, some which you want to keep their trajectory going, but you want to add on this other layer. Whenever you try to coexist in two speed worlds, it is not an easy challenge. Some will make it and some will not.

Q: At least you have got all of these companies, as I mentioned, on your watch list for 2016. But since we are talking about technology, let me take the conversation forward to what we heard in the US presidential debate, the first between Donald Trump and Hilary Clinton. Donald Trump making it very clear, he did not name India, but he did name China, he did name Mexico, he talked about exporting jobs out of the US to emerging markets, he talked about wanting to bring jobs back and there seems to be this increasing trend towards, if I could call it, deglobalisation. How concerned would you be because this does not seem like a rhetoric any longer. The Brexit vote is an example of that.

Lesser: I am concerned, but I also think there are some underlying trends to that as well. We are seeing it. It is in the United States, but it is not just in the United States. Brexit was an example, we see it in other parts of the world too. A rising concern around globalisation and some of the principles that have underpinned tremendous growth in the world economy in years passed. And the rhetoric is intense, the number of people in the US who now question whether trade is in the US’s best interest, another thinks it is much higher than it has been. So, I do believe that is a challenge. Whether you look at the United States or the world, I do believe we are all better off if we foster an environment that encourages trade, encourages investment around the world, encourages the development of human capacity, not just in one country, but in many countries.

The other thing I would note though is some of the what is going on and it is being pinned on globalisation, is being misdirected that in fact the real pressure and it is a real pressure that will occur on jobs and how economies and societies that were developed in the years ahead is related more to technology than to globalistion. And frankly, the nature of globalisation itself will change because of technology. So on the first, many of the studies would say that actually the challenge of so many losses and manufacturing jobs, everybody points to the factory that moved over seas. But a lot of it is even when factories come back, and a number have, they come back needing many fewer people inside them than what had left years earlier.

And that pressure on technology in both classic manufacturing and in the service industry is going to continue in a world of robotics and machine learnings and artificial intelligence. And as a society, and I mean this not just for the United States here in India, around the world, we are going to need to invest enormously in human capital to help people make the jump in what will be expected in many traditional jobs and we are going to need to invest in safety nets and cushions to help the people that are disrupted as this technology rolls through. The benefit on the other side will be a real opportunities productivity step ups and delivering more value to consumers and to patients and to investors, there will be many opportunities.

Q: But in the interim, as we move towards those kind of productivity gains that you talk about, we are faced with the possibility of job losses, a country like India where we keep talking about the demographic advantage and the demographic dividend will have a real challenge. How real is this business of industry 4.0 and automation because it is pretty much like climate change? There is one camp that believes that the threat and fear is exaggerated and there are others that believe that no, this is real and it is not 5-10 years down the line, it is now.

Lesser: Put us in the camp that believes it is very real.

Q: And it is now?

Lesser: Now, not every industry, every plant tomorrow, but over the coming years, yes, more and more. Just like every wave. It does not happen all at once everywhere, but this is not about opportunities that are a decade ahead. This is about opportunities and challenges that will come in over the next 2-8 years in many of the industries around the world. And you are right. It is a challenge not just in the developed world. It is a challenge in India and other places.

What I do believe though is we have always underestimated that other jobs get created when new technologies come along, when new opportunities. So there is a tendency to see the half empty part of the glass and not to note the half full part. The difference here, and it is a real difference is one, these technologies are developing very quickly and two, the level of change in skill level to be able to be a data analyst or to be able to operate in a more machine intelligence world, those elements are important and we have to make investments in helping workers to bridge this gap and helping the next generation of workers have the skills to be able to compete in and have good jobs and build good productive lives. There is a lot of work in front of us.

Q: How far are Indian companies in getting that work done? And how are they trying to address this challenge?

Aggarwal: Firstly, to the point you said, is it here and now or is it later. Most technologies operate like an S-curve. They start slow, but they reach inflection point and it takes off. Having said that, I would also de-average, every industry is not the same. So, you take textile industry. The ratio of labour to capital, it will still be much more labour intensive.

Q: So, is that the sort of sector, when the government talks about job creation, that the government really needs to do much more with because that is the sense that we get.

Aggarwal: So, for example, textile is very critical for us. It can create 30 million additional jobs. It can employ people who are less educated. It can employ people of all genders, disability, all of that. So, the Cabinet recently announced a package for the textile industry, Rs 6,000 crore package and we had been involved in some work with the industry association on that.

Q: But is that enough?

Aggarwal: India versus China and some of the other countries there is a 10 percentage point gap on their cost of production versus ours. But this, the gap comes down to 4 percent. It is still a gap, but then the belief is that the corporates step up on efficiency and production and then bridge the gap all the way through.

Q: We were talking about how India has jumped 16 spots on the World Economic Forums global competitiveness index and this is big stuff. We have also moved up in the World Bank’s ease of doing business rankings, perhaps not as much as we would have liked to but is this going to be something that will further boost investor confidence?

Lesser: Yes, I really believe that. I think that as long as there is a sense that the momentum is continuing in a positive way, I actually believe that it becomes then self reinforcing because then businesses want to invest, then government sees there is actually value in continuing the reform and more businesses want to invest. So, the challenge is to make enough progress to get that virtual cycle started. I think once it is started, as long as the commitment is there to stay the course, to really help make it work, I actually do think it is a very good indicator of the progress that has already been made but also a very positive indicator of what is to come.

Q: What are you seeing on the ground, your assessment of what has changed on the ground, what are your clients telling you, what are the companies that you work with telling you on both these parameters, competitiveness as well as ease of doing business?

Aggarwal: I clearly see visible progress being made on the ground. For example, let us take the area of ports, Richard talked about it earlier, we have been involved in some of the work there. There is a composite index which gets published called the Logistics Performance Index (LPI) which takes multiple factors on the ports into account. India has jumped 17 points on that.

Now, these are core enablers and everything else can get laid on top of that. So, whether it is ports index or whether it is the rate at which roads get built, if those things come together and then similarly on the -- for example, the work being done on top of Aadhaar and some of the other things on direct subsidy, etc, those are all very critical enablers and multipliers can get created on top of that. So, I see the building blocks of the virtual cycle being created and the fact that this becomes vocabulary then it shapes behaviour across the chain.

Q: What about the innovation quotient and I am again looking at data that BCG has put together. In terms of the most innovative companies of the 2015, of course Apple ranks right on top followed by Google, Tesla, Microsoft, Samsung and we have got one Indian entry at number 26 which is Tata Motors. Even if I were to take a look at the India, China comparison, China has two companies and India has one which is Tata Motors. So, clearly more needs to be done on the innovation front?

Aggarwal: To some extent I agree and to some extent I will add a nuance to it. I think if you look at the big corporate level, we start off with a slight disadvantage because our size of the -- absolute size of the corporate itself is somewhat smaller than the global scale, so, you start with that disadvantage. Then the percentage of the annual income which gets spent on R&D, etc, those things come in the way as well. However, if you see the trajectory, if I look at the list which is not published, if I look at this list which is behind it right, I see a lot more. Rather than give names what I would say is, if you take the percentages there, you will see a lot more companies vying for attention and I can see if I roll the clock forward, a lot more making way.

Q: Five Indian companies in the global top innovators list by 2018 or 2020 you think?

Aggarwal: Why not even more than that and I will tell you why I am saying that, because if you see the start-ups, which is some of the building grounds, we are now the third largest community in the world. We have 4,200 start-ups, some exciting stuffs happening. I think the innovation playground will have a western bias to it, but we will strongly have an eastern access and India and China, which has unique problems but has unique opportunities because of technology will play out very big role in that.

Now it’s hard to speculate on the year, but soon enough the percentages will go beyond 10-20 percentage at times.

Q: But do you see people making more R&D investments now?

Aggarwal: I think it is fallacy to measure it on R&D. Ultimately, it comes from solving a true customer problem on the ground and the fact that total shareholder return drives companies, but ultimately people want to include more and more customers into the fray, get them to buy more and more services absolutely that is happening and that’s need innovation day in and day out.

Lesser: We did a very interesting work last year about the difference between exploring and exploiting. Exploiting is taking the current model you have cranking out a few more percent productivity, exploring is being more open ended and searching for new business models, new ideas and then in fact one of the challenges in the world right now is to much of company’s investment is geared towards the exploiting the models that exists versus exploring to create new models.

India has two things going forward that will help in the years ahead. One is it got an enormous technology base and increasingly the exploring part involves leveraging digital and technology and there is a strong foundation here and two is I think India is one of the places in the world where people really believe it is going to grow a lot and you are always ready to explore more and push the envelope when you see growth and change in society then when it feels like the status quo and more stagnant. We will see more innovation coming out of India and that list growing and other indications of a healthy innovation pipeline in the years ahead as digital capabilities continues to get build and as companies sustain their confidence over the future of the economy.

Q: In terms of the global mergers and acquisitions (M&A) climate, do you believe that 2016 is almost over now, but 2017 is going to be a big year as far as M&A is concerned and do you believe we are going to see more inbound FDI or are we likely to see Indian companies be more aggressive, when it comes to acquisitions?

Lesser: What I would say is one I don’t think that it will be a great M&A climate next year. I think the regulatory backdrop is quite negative towards M&A right now. There is enough uncertainty in the world. I don’t think it would regress to the levels it was at 4 or 5 years ago, but nor do I think it will return to the peak of the last the year or two before this one in between sort of middling. On the FDI in India I expect that we continue to be very positive.

Q: Indian companies making big ticket acquisitions, do you believe that this is going to be that point in time?

Aggarwal: I think whenever we take a very short-term view, we always either under estimate or over estimate. If we take a medium-term view, one, there is a whole need for consolidation within India. I see that wave happening. Be it financial services sector, in telecom you are starting to see that happen already so I see that cleanup happening in a very major way.

Q: Financial services, telecom, which are the other sectors where you expect consolidation?

Aggarwal: Even among the startup community I think there are many across area. So, there would be, so, you would see that happening for sure. Some places these companies want to take global bets but it will be far more selective. The recent experiences have been middling, some have worked out, some have not. So, I think the hurdles will be higher on where people take bets.

Q: Specifically from a technology point of view because we are talking about building capabilities, do you think that Indian IT is going to have to go shopping much more aggressively?

Aggarwal: The whole IT industry is in so much flux that who will partner with whom, who will shop with whom, who will collaborate with whom is in a whole sea-world of change.

Lesser: I agree and the other thing I will add is I don’t think that buying other companies, I think there will be an investment agenda and it will be in an aggressive one. However, there may be very small boutiques that maybe trying to hire the right individuals, it won’t necessarily be a view that getting another big company is the solution to the problem. There are some in the big companies but a lot of it is not. So, I think that the place maybe beyond that.

Q: You have been recruiting quite aggressively and growing quite aggressively here in India, one of the top recruiters both at IIT and IIM on campus, what can we expect for BCG in India now that 20 is done?

Lesser: I think our journey is just beginning. 20 years took us from zero to a 1,000 people. I was a part of it in 1996, I would have never guessed we would be at 1,000 by this point in time. I think the years ahead are very bright and I think that we will be continuing to strive to be a leader ourselves but more importantly to help many Indian companies and frankly Indian companies become leaders and help the public sector do everything it can to help it citizens and that is our mission and we have a whole lot of opportunity ahead of us.
First Published on Sep 28, 2016 04:22 pm