Trends for 2011

1. MORE ACCOUNTABLE GOVERNMENT

Post liberalisation, the government’s role in the economy was defined by its hands-off and market-friendly policies. The public believed that the powerful nexus between politicians, bureaucrats, lobbyists, and businessmen had lost its stranglehold on the country—until the end of 2010, when the Niira Radia tapes exposed the corrupt underbelly of the system.

Will all the sound and fury caused by the tapes lead to any changes in 2011? “The focus of influencing government policies will shift to industry associations such as the Confederation of Indian Industry,” says Kaushik Dutta, director general, Thought Leadership Institute, a nonprofit organisation that researches issues of corporate governance. “There will be greater efforts to institutionalise industry bodies that speak for groups of companies rather than for a single company,” says Kiran Karnik, former president of the National Association of Software and Services Companies.

Privacy will be another concern. A policy or law on phone tapping is likely to make it harder for the government to eavesdrop on private conversations. “Only those suspected of anti-national activities or other heinous crimes should have their phones tapped. There must be a strong reason for the government to do so,’’ argues Surjit Bhalla, managing director, Oxus Research and Investments, a Delhi-based research and portfolio management firm.

There could also be some effort to bring down corruption. Since it generally has its roots in the discretionary powers of ministers and bureaucrats, the government may be forced to regulate such powers.

2. STRONGER, MORE EFFECTIVE REGULATION

The Rs 1.76 lakh crore 2G telecom scam has a positive fallout, says Pradip S. Mehta, founder and secretary general of the Jaipur-based Consumer Unity & Trust Society. In one stroke, it has exposed the inadequacies of the Telecom Regulatory Authority of India (TRAI) in managing the fast-growing sector. “If the regulator has to discharge its duties effectively, it will need to have enough independence. We could be seeing the beginning of a new era for regulators,” he says.

While existing industry regulators—the Central Regulatory Authority Commission, Insurance Regulatory and Development Authority, Pension Fund Regulatory and Development Authority, Securities and Exchange Board of India, and TRAI—seek greater powers, there is also the need for regulation in other sectors to ensure a level playing field. Take microfinance, for instance. The T.H. Malegam Committee, appointed by the Reserve Bank of India (RBI) to study issues plaguing microfinance institutions, is expected to release its report in mid-January, and there’s a strong possibility that a regulator will be set up later in the year. Justin Oliver, executive director of the Centre for Micro-Finance at the Institute of Financial Management and Research, says the RBI should broaden its jurisdiction to include smaller microfinance units run by nongovernmental organisations. The bank already regulates bigger nonbanking finance companies.

The real estate sector is another candidate for regulation. “The possibility of setting up a real estate regulator has been discussed for a while. To ensure the welfare of the industry, an agency needs to be set up as soon as possible,” says Sanjay Dutt, chief executive officer, business, at real estate services firm Jones Lang LaSalle India.

Naimesh Shah, chairman of the Confederation of Real Estate Developers Association of India, says a regulator is needed to ensure that all stakeholders deliver on time.

3. MARKET FOCUS ON DOMESTIC ISSUES

With close to 5,000 listed companies on its exchanges and almost $1.5 trillion (Rs 67.45 lakh crore) in market cap, the country’s stock market is a barometer of its economic health. It’s impossible to predict how the market will fare in 2011, but analysts broadly agree on trends that will shape its performance.

“If it’s pain points that we’re talking about, we see higher commodity prices—especially oil—and inflation as key concerns in the new year,” says Nischal Maheshwari, head of research at Edelweiss Securities. “Certainly, trouble in Europe—and that includes banking woes in Ireland, and problems in Portugal and Spain—could aggravate the situation, but domestic issues will be more significant.”

Nilesh Shah, deputy managing director, ICICI Prudential asset management company, adds that the periodic resurfacing of the European debt crisis is good because it highlights India’s strengths despite some short-term adverse reactions.

The other factor that analysts say will affect the market is the next round of government divestment. “We’re talking about a primary market capital-raising move that could add up to Rs 40,000 crore or Rs 50,000 crore,” says Rahul Arora, CEO of institutional trading at Nirmal Bang stock brokers. He adds that the success of PSU disinvestment will depend on how stable secondary markets are.

The follow-on public offer for state-run IndianOil could well be the largest ever divestment, but its success will depend largely on the resilience of the markets. Shah emphasises that the pricing of such disinvestments will be crucial. “At the right quote, it could go a long way in attracting money from foreign institutional investors and retail investors.”

4. THE HUNT FOR TALENT

Companies talk about the ‘triple bottom line’, referring to people, the planet, and profit. But what they are often combatting is pauses in progress, the paucity of talent, and the poaching of executives.

As the economy hurtles into 2011, it faces a talent crunch that has been building up over the past few decades. And it’s not just in the technology and engineering sectors, but also in areas such as retail, services, and C-level leadership.

Rajeev Dubey, president of human resources for the Mahindra group, says companies will face a shortage of talent at the entry, middle, and senior levels. He asks: “Do we have enough global leaders who can manage multicultural teams and businesses? Is there a substantial middle management cadre that can execute and implement decisions? And are there enough qualified entry level staffers?”

Mohit Gupta, director of staffing firm Teamlease Staffing Solutions, says the shortage will not necessarily be only at the management level. “Having a strong field staff could actually get more challenging than poaching a CFO,” he says. “The quantum of demand at the entry, junior, and mid-level is unprecedented, and real growth will depend on getting that part of the puzzle right.” Dubey says companies should probably look within. “There’s abundant potential within most companies, but it’s up to the management to identify, train, and groom it as necessary.”

5. RUPEE CONCERNS

The second round of quantitative easing (buying up government securities worth $600 billion) by the U.S. government in November 2010 is unlikely to enthuse emerging economies. The excessively loose monetary policy in the West can only push up commodity prices (oil is hovering around $90 a barrel), stoke inflation, and result in currency appreciation in these markets. Countries such as Brazil and Korea have restarted capital controls in an effort to keep out excessive funds.

For India, however, large capital inflows in 2010 (around $29 billion until the last week of December) have proved a blessing in disguise. They have helped keep the current account deficit to around 3.7% of the GDP despite the widening trade deficit. The $145 billion deficit, estimated by Deutsche Bank for 2010, has largely been compensated by foreign portfolio investments. Thus, the central bank could afford a hands-off policy.

But can the country afford that luxury next year, as it grows at over 9%? Not necessarily, says D.K. Srivastava, director, Madras School of Economics. “A renewed surge in capital inflows—most likely because of the huge growth differential between India and the rest of the advanced economies—could push the rupee to Rs 40 to Rs 42 by the year-end. However, the real extent of the appreciation will depend on the RBI’s decision to intervene,’’ he says. In other words, the point at which the central bank starts the sterilisation process—soaking up excess dollars and releasing a similar amount of rupees into the system—will actually determine the rupee’s exchange rate vis-à-vis the dollar.

A recent report by Standard Chartered Bank says the rate is likely to touch Rs 43 in 2011, interspersed with brief reversals due to global uncertainties. The pressure on the rupee will be triggered by capital inflows.

However, aggressively using open market action to curb exchange rate appreciation will fuel inflationary pressure. With inflation touching 8.58% in October 2010—way above the RBI’s comfortable mid-term range of 3% to 4%—it’s already on slippery ground. An appreciating rupee could hurt exports.

Finally, cross-border flows will depend largely on the prospects of the U.S. and developed markets. If their economies improve, the pressure of capital flows into emerging economies will subside. Otherwise, the RBI will have a tough time balancing rising inflation, an appreciating currency, and higher asset prices.

6. INCREASING PHILATHROPHY

In much of the country’s post-independence economic history, resources were scarce and tightly controlled by the government, and individual earnings were squirrelled away rather than getting redistributed. This is not to say that Indians supported no causes: Some of the biggest business houses built hospitals, schools, temples, and so on. But these have been mostly corporate social responsibility initiatives, as opposed to personal gifts.

Some also argue that India’s needs are different from those of other countries. “While giving away 50% of your wealth to philanthropy sounds good, this money can also be used to create wealth,” argues author and business historian Gita Piramal, who comes from a storied business family herself. “In a developing country like India, both philanthropy and the creation of wealth by generating jobs are needed.”

Even so, a generation of post liberalisation billionaires—including Azim Premji, Shiv Nadar, Kiran Mazumdar Shaw, and Sunil Bharti Mittal—is warming up to the idea of donating its personal wealth. The trend is a reflection of the substantial growth of personal fortunes in recent years. According to a report by Karvy Private Wealth, individual wealth is expected to double from Rs 73 lakh crore to Rs 144 lakh crore by 2013.