Why large companies does not lead Innovation?

Why it’s always an unknown start-ups linked to every disruptive innovation in recent times and not large corporates. This malaise could be traced centuries back.

“Why large companies does not lead Innovation” may not be appropriate since they do innovate but it’s incremental. Innovations from their stable is like Version2, 3 and so on. Their innovations are rarely disruptive or game changer except in few cases. And this seems to inflict every company who starts with a Big Bang Innovation but as it becomes large, forget to how to be creative again. It was not established large IBM but off the block Microsoft to bring the best Personal computer operating system but then it was not large Microsoft but relatively start-up Apple, which got it right with mobile operating system. There are umpteen such examples where start-ups have beaten large companies in bringing about disruptive changes in their Industry.

It should not be the case. Innovation = Talent + Resources and who could beat these fortune 500 companies in hiring the best talent from campuses or managing all the resources needed. So what’s going wrong?

I just finished reading Simon Singh brilliant book on origin of Universe; Big Bang. It was surprising to note that even innovators / Scientists / astronomers were behaving like large corporates of todays. It takes ages even to acknowledge new Idea from a budding scientist by the renowned names thereby wasting precious human time and endeavour to move forward. Copernicus, first mooted the Idea of Sun and not Earth being at the centre of Solar System in 1514 but it took more than 300 years for the scientific community to accept this Idea. Almost 200 years after Galileo made observation to support Copernicus. This was not only because of religion (Church being against the change) but also due to well-known and reputed names in the field of astronomy resisting the new Idea. This has not changed in 20th century as well. It took almost 40 years for Einstein to be convinced that there is no need for a cosmological constant in his general theory of relativity as Universe is expanding. He out-rightly dismissed this new Idea from new kids and his dismissal means instant death to the new way of thinking about origin of Universe. Though later this was proved right and Einstein himself acknowledged that cosmological constant was the ugliest idea and he was never comfortable with it. Simon Singh has summarised this beautifully in his book;

The shift from one paradigm to another could happen only once the new paradigm had been fully discredited. The speed of the transition depends on numerous factors, including the weight of evidence in favour of the new paradigm and the extent to which old guard resists the change. Older Scientists, having invested so much time and effort in old paradigm, are generally the last to accept the change, whereas younger scientists are generally more adventures and open minded. The paradigm shift might therefore be completed only when the older generations have retired from scientific life and the younger generation has become the new establishment.

This is so true for an established large corporates as well. The do recruit the best talent from younger generation but hierarchy on the top always comes from older generation (more so now as average life span has increased and retiring age is moving north). This Older generation has tasted success albeit a long time back by doing things in a certain way. It’s impossible for them to understand why same way of doing things will not bring in more success. They only promote those new ideas / innovation which is only incremental, does not try to make paradigm shift and is predictable. Imagine how a 70 year old head of any large conglomerate would have reacted in late 1990s if one of his young recruit has presented a social networking Idea like Facebook. He will be lost to understand why people need to connect on Internet, they could probably connect over a dinner at Restaurant and therefore opening a restaurant is probably better business for him.

So how to make that leap from slow moving behemoth to nimble start-up. You can’t. But there is way out and some of them have already started doing. Remember, these behemoth has the best talent and resources. They could not only make disruptive changes but also mobilise resources to quickly get the acceptance.

First, Instead of trying innovation in the existing and tired corporation, support a budding start-up like any other PE / VC fund. The R&D fund given to these start-ups will provide better results than wasting on internal R&D, where any good idea will take eternity to come out of bureaucracy and gain any visibility.

Second, encourage entrepreneurs within organisation. Start-ups within conglomerate, divorce from any existing corporate hierarchy.

Third, move older generation out of the way. Let them lead and run established business, don’t let them take decisions on new Ideas. They should be driving at left lane and right lane should be cleared for new generation.

We need Innovations / New Ideas to fight against poverty, climate change, income disparity, gender inequality and so on. Start-ups ability to bring change at large scale is limited and takes time. Large corporates hoards all resources and it’s important that they become part of change. Otherwise it will take another 300 years for Sun to occupy centre of our solar system.

2017, a year of hope & despair

2017 was such an roller & coaster ride for Indian economy.

What a contrasting two years for Indian economy, 2016 started with hope and ended in despair and in contrast 2017 started in despair but ended with hope. Who could remember that 2016 calendar year first quarter started with India growing at 9.2% while 2017 at 6.1% which plunged to its lowest at 5.7%. That’s where it’s important to look at events which shaped up during this year and in spite of one of the lowest growth year for India in recent years has more of hope at the end of it.

Even before 2016 was hit by demonetisation of high value currency, GDP trend was already heading south, from Jan-Mar @9.2%, to Apr-June @7.9%, Jul-Sep @7.5% and Oct-Dec @7%. Demonetisation was the proverbial last nail. Young 2017 inherited the mess of demonetisation with business confidence at its lowest but ended up by helping markets to grow by 28% from 26595 to 34056.

Demonetisation hardship to public was expected to last beyond March but an early end to general suffering mitigated some of the fears. ATMs and banks were back to normal in dispensing cash which helped people and businesses to quickly get into recovery mode, though impact lasted well into Q1 of the current financial year, with GDP hitting the bottom at 5.7%. Next on card was Budget, with UP election round the corner, there was general expectation that government may go for charity and miss the fiscal deficit target. A budget which not only kept fiscal deficit target sacrosanct but kept in line with long term goals restored investors’ confidence in India story. Thumping UP election victory meant, demons of demonetisation was finally buried for the good. How could we miss our own Rexit story, our own RBI Bond, Mr. Raghuram Rajan was on his way out. There were concern around his replacement and the stance on banks NPA, monetary policy etc. By nominating Mr. Patel to the post was continuation of Rajan mandate (as actual architect was of this policy was Mr. Patel) and implementation of Monetary Policy Committee (MPC) ensured transparent way of setting inflation target (and therefore Interest rate – a continuous bone of contention between RBI & GOI). Under his watch, RBI referred first set of cases under Insolvency & Bankruptcy code (IBC) triggering the final act of clean-up and pushing government to shore up the PSU banks capital, which they promptly announced.

But mother of all was announced mid-night of 30June in the Central hall of Parliament. India was finally going to be a true single market economy with implementation of Good and Services Tax (GST). This was truly revolutionary and as it happens with any such gigantic disruption – Chaos followed. It disrupted in the way business was done till date. Not only people were not ready, it turns out government didn’t helped the cause. Thankfully, system were responsive and during last 6 months, through multiple pro-active interventions, implementation has been stabilised to a large extent albeit taking its toll with Q2 GDP growth rate struggled at 6.3%.

Still, the million dollar question is, was 2017 a glass half full or half empty and depending on your allegiance to government or opposition, there are enough arguments for both sides. If we go by markets, it seems they are on the half full side. Sensex has moved from 26595 to 34056 and rupee strengthen against dollar from 68.32 to 63.83. This has to do more with hope (than facts) reflected in trend. Unlike last year, after hitting bottom in Q1, Q2 GDP moved to 6.3 and with tailwind, this trend is expected to continue with better GDP numbers projected for Q3 and Q4. The increasing trend line is also supported by global growth rate of 3% plus and general positive cue from around the globe. Brexit seems to be on track after initial hic-ups, Trump has got his Tax reforms through, and China is doing well and so on.

While it’s not all great going into 2018. Domestically, there is lurking inflation and political drama unfolding with IBC impact yet to hit Banks in full. Globally, demise of ISIS is followed by Saudi – Iran problem, possibly hitting Crude Oil price.

All said and done, 2018 inherited a far better world than 2017 and as we welcome young 2018, let’s say goodbye to our old friend 2017 who helped us all to be more hopeful about our future.

 

 

US tax reforms – time for India

US tax reforms should help us to make changes to India direct tax code

Yesterday President Donald Trump signed sweeping tax reforms impacting Individuals as well as Corporates. The tax cuts are significant with peak corporate tax reduced from 35% to 21% and Individual highest bracket from 39.6% to 37% (important changes in 7 buckets for different category of tax returnees). Reform also include changes in components like standard deduction, exemptions, and tax credits and so on.

On 20th Dec, Indian Income tax department released a report basis FY14-15 income tax returns. Only 4.1 Cr. (Population – 130 Cr.) has filed returns of which 2 Cr. has declared NIL taxable income, which is less than 1.5% of the population. And surprisingly (not really), less than 10,000 Indians have taxable income of over INR 1 Cr. (2000+ cars sold by Merc, Audi & BMW in first 5 months of current year!). The growth in taxpayer has not been any great averaging at about 50 Lacs annually for past 3 years (could be higher in current year due to demonetisation). And therefore Tax-GDP ratio is at 5.6%, compared to say US which is at about 26%.

After long-awaited indirect tax reform through launch of GST, it’s time to look at direct taxes. Fact remains that given a choice none of us would like to pay a dime to government and hence a large number of tax payers are salaried who have no choice but to comply (TDS means government has taken its cut before it reaches our pocket; traders are learning it now). Most of them try all the trick allowed like fake LTA, Medical bills, rental deduction and so on. Post demonetisation, GST roll-out and initiative to link Aaadhar means there is likelihood of increase in number of people falling under taxable income. To ensure that all these people, instead of trying to figure out a way to avoid paying tax (and filing NIL tax returns), willingly pay their share of burden towards government expenditure – There is urgent need to rationalise our tax structure. GST will help government to increase their indirect tax collection and with subsidy being rationalise, it’s only right to provide some relief to honest tax payers and add fence sitters, who would like to change colour of their money.

US tax reforms provides a good benchmark. If a country with such high per-capita income is willing to cut down rates, why not India. Direct tax reforms should include lowering tax, increasing tax-slabs, increasing standard deduction, doing away with exemptions and cess, simple filing etc. The rumour mill is buzzing with such an expected reforms being announced in current budget. Let’s do it now than waiting for 10 long years, as we have seen in GST – 10 years has not helped to implement any better.

 

India de-coupled with India

Why our market is not in sync with all the news on economic fundamental. Who is right, market or economy?

Q4 GDP at 5.47% is lowest in last 3 years, PMI reading is trending below 50, Trade deficit is increasing with current account deficit at 2.4% is highest in 4 years, retail and WPI inflation are trending up, demonetisation impact as per first reading is discouraging, final reading of Monsoon is poor with uneven distribution leading to flood in some parts and drought predicted in other parts of Country, Crude price is inching up, PSU Banks continue to struggle under NPA with promised capital infusion still to come in, Private Investment is off the radar, new job creation is minuscule, start-ups are going belly up for want of funds.

Sensex at 32,272.61 and Nifty at 10.085.40 are at their peak levels, Forex reserves hit $400B.

Both statistics are from last 45 days.

To an alien who landed today and read both numbers, will conclude that one country is wretched and another is prospering. He will be mighty surprised if told that both information pertains to one Country, Incredible India.

Does this mean India has decoupled from India. At one level, this looks like a very likely scenario. Our macro & micro economy published (projected seems great?) indicators are poor & discouraging but if you watch our markets, the see-saw is now mostly linked to global indicators. Even if India PMI has dipped but China manufacturing numbers is strong or US employment data is positive, markets will move up. Conversely, if India inflation is down but due to Irma hurricane, crude prices has firmed up; markets will go down.

During last year global crisis, we were boasting that India is decoupled with global economy and hence the crisis is insignificant for India. Part true, but not entirely as we seen subsequent and delayed impact.

Since then, it seems we have moved to other extreme. While domestic economic indicator is weak, market is still going contrary fuelled by overdose of liquidity as both FED and EURO Central banks have still to curb / hold bond purchase? Post demonetisation, even domestic funds / financial institution, retail investors are flushed with liquidity, with real estate sector in limbo and no private investment is coming up, all are flowing into one direction…..to market.

Investors are holding on to any good new, however irrelevant it is?

All are talking about impending crash. But wish & hope that Sun never set.

Logic says, it will not sustain, it will collapse.

But we all are busy manipulating logic.

As happened in 2008, if market has to sustain its new found glory, global good news will only take it so far. Domestic fundamentals has to improve and all current information has to be feed into market to take a sensible long term approach. It does not mean that there is crisis, but current euphoria is not aligned to ground reality and sooner market found its feet, we all be less bruised.

India can’t be decouple with India; however incredible we might be.