Exclusive Interview with McKinsey’s Kevin Sneader and Gautam Kumra on CNBC-TV18 with Shereen Bhan

Q: The world is coming to terms with what COVID-19 means for the economy, for their own businesses individually and everyone is trying to figure out what the new normal is going to be. When you speak with your clients, when you are talking to global CEOs, what are the risks that they are raising with you? What are they most concerned about today?

Sneader: They have been very concerned about the health situation. Everybody recognizes that the focus is around a pandemic, it is not an economic – the initial trigger. The economic impact has come because of the impact of that pandemic. So first and foremost, in the minds of business leaders I have conversation with is, how is the virus spreading and how this has impact on the decisions we make. That is quickly followed by how do we think about either reopening our businesses if they have been closed or re-adapting them to what is now a very different future than one, we had envisaged. So that is now increasingly the focus given where the world as a whole is, recognizing great differences between countries.

Q: I want to talk to you about an aspect that you raise in the two reports that you have written on the outcome of COVID and what the impact is going to be. We are seeing this the world over with governments stepping in with bailout packages, different quantum across different geographies, central banks stepping in as well, what is that going to mean in terms of government and business? Does it necessarily mean more regulation, more scrutiny of the way the business operates, how do you see this playing itself out?

Sneader: It is definitely a question that we can all speculate around but I think there are some important points to remember. In many parts of the world, government has become the payer, lender and the insurer of last resort and when that has happened in the past, government understandably has expected to play an ongoing role in how that money is looked after and spent. The consequences of those decisions linger for quite some time.

So it is reasonable to assume that with government having to place an increasing amount of resource in order to ensure either we buy time for the health system to be able to react and cope with the influx of cases or to safeguard the livelihoods of many people and the livelihoods of many businesses as there is a consequence to their action. What it is going to mean is that in some parts of the world, there will indeed be a step up in scrutiny because they want to know how that money has been spent but it also could mean that in some parts of the world the big issue is going to be how do the governments back out of the business? If the government indeed had to step forward, which it has, how does it get back out and what does that look like?

So however, you look at this, the role that government plays is indeed going to be one that is going to be pivotal in the post pandemic world.

Q: What are the other trends that we are seeing and this has perhaps been exacerbated because of the COVID pandemic, but trends that had already started a few years ago post the 2008 financial crisis, the retreat of globalisation and the move towards de-globalisation, what do you believe we are going to now start to see happen and what will that mean in terms of restructuring, reordering of global supply chains?

Sneader: In many cases what COVID-19 has done is to either accelerate or perhaps make more visible trends and forces that were already at work as opposed to star new ones. That is exactly what we are seeing with globalization.

If you think about the flow of goods, that is already in decline for many different reasons but it was in decline. It was services and data that was increasing goods that we are storing. What we have now got is an acceleration of that decline I suspect because one of the reactions to what has happened is an increased emphasis on resilience over the willingness to look at efficiencies. I think resilience and efficiencies now must come together and that will mean that maybe they will look at their supply chains and decide they want to bring those closer to where the end consumer is. As they do that, that could indeed mean less movement of goods and indeed components around the world.

The other reality that we are dealing with and part of this next normal is that distance is back. People are much more aware of distance. We spent much of the 1990s and 2000s talking about the death of distance because of technology enabling world to be shrunk and brought closer together. However what we have just had is a movement in time when barriers have gone back up, borders are back in place where they were not for many years and you can see that happening across the world and so too are tariffs and other ways in which goods and people importantly are less able to move around the world than they were in the past.

So if you think about the flow of goods and you think about the flow of people, in important ways an acceleration of the trend against that happening means that globalization is under attack. It was already under attack because of the issues that had arisen around who had benefitted from it but now we are seeing another form of attack on it and I think it is the case that globalization as we know it is going to be very different in the future. I don’t think it is going to completely disappear, it is hard to stop the flow of data and information much as many would try but when it comes to goods and people, I think we are going to see a very different kind of slowing form of globalization which would give way to regionalization and perhaps even nation interests far more than we have seen in the last few decades.

Q: What is this going to mean in terms of reshaping of global trade as we know it today? The rise of economic patriotism as well as at this point in time the assumption that as global supply chains shift out of China that countries like India could be beneficiaries, how do you put the two together?

Kumra: It is important to know that even pre COVID, there has been certain fundamental trends that Kevin pointed too. If you look at trade intensity, in terms of global trade as a function of global output has actually been coming down over the last two decades or actually more in the last decade. Also the share of intra-regional trade has been going up, in fact as you might know about 20 percent of the global trade is now happening just South- South or China- South, and more than 50 percent of the trade that is happening within South and even Europe is now intra-regional. So these trends have been actually much underway and I think COVID is actually going to further accelerate those.

Having said that you cannot deny the equal amount of pressure that is coming on companies globally to drive competitiveness in addition to resilience and I think that is where the opportunity lies.

As you are aware I think the share of China as a percentage of total low cost sourcing to the western world is going down and I think many countries are vying to get a share of that. I think we have taken inspiration from Vietnam in electronics and we can see what Bangladesh has done in textiles and I think India must rise to the occasion now and I think we have this last window of opportunity to actually take a fresh air, but it is going to require getting our act together and really competing fiercely with markets not only like Vietnam and Bangladesh but also Indonesia.

Q: So what does that mean, you are saying that this is our last window of opportunity and India must get its act together to try and draw in investments that might otherwise shift from China to Vietnam, Indonesia etc. and we have seen that trend over the last few years. What will it take for India to be able to do that? We have seen some announcements as part of this Rs 20 lakh crore package that includes reforms announced by the government what do you make of that to start with the reform side, I will come to the stimulus side in just a bit but what do you make of the reform agenda and what will it take to draw in investments?

Kumra: I am actually personally quite encouraged by some of the reforms that have been announced over the last week which I think will make us more competitive in the medium to long term. If I just look at the power one as an example which goes back to export competitiveness, the issue is when we are competing with countries like Vietnam and Indonesia and Bangladesh I think it is fundamentally about cost competitiveness and reliability and unfortunately in a couple of these areas if you take even mobile, electronics, manufacturing and electrical components I think we have a cost difference to cover. If you peel that apart, a part of that has to do with taxation, but a big chunk of that has to do with real issues in land, labour and power cost.

As you know our power cost is amongst the highest in the world and I am delighted that some of the reforms that got announced last week to privatise the discoms in the union territories and to bring cost tariffs, tariff rationalisation are all headed in the right direction. Hopefully, if we can execute on some of those things, I think it will help take one piece of un-competitiveness away, I think we need similar set of initiatives on land and labour for us to be able to compete globally.

Q: You just addressed the reform side of the package, but let me also talk about the stimulus side of the package and McKinsey had done a scenario exercise where your assumption was that if the lockdown were to continue through May and that is the third scenario that you painted and we are in that at this point in time, it could mean a contraction of between 8-10 percent. Now on the back of the stimulus part of the package that has been announced do you believe that we will be able to offset some of the output loss?

Kumra: I think that is too early to tell, since you referred to the scenarios let me just remind you, I think we had talked about two scenarios which predict GDP decline this year of anywhere between 3-8 percent, in the scenario two which was more like minus 3 percent this year we had recommended in fact a fiscal package in the range of about 5 percent of GDP. As you know what is interesting is the government has announced a fairly large resource allocation amounting to almost 10 percent, but as you know I think it has got many things in it.

As you are aware, the package is quite heavily oriented towards monetary stimulus and extending credit support to different stakeholders in the country. If you were to do apples to apples comparison, I think in reality the fiscal components of that package is somewhere in the region of about 2.50 percent because majority of it actually has to do with monetary and liquidity support in contrast to that we had recommended something in the region of about 4-4.50 percent, but it is quite complex.

As you can imagine that there are many dimensions to the nature of the package and it is not just India, but if you look at any of the global packages whether it is the US or elsewhere, they all have a combination of monetary and the fiscal support.

Q: They do have a combination of monetary and fiscal support, but on the fiscal side you are right that the stimulus, the direct fiscal stimulus announced by India within that Rs 20 lakh crore number, much smaller of course, a large chunk of it is also loans and guarantees. But on the manner in which governments and central banks around the world have responded to the COVID crisis, the kinds of stimulus packages that have been announced and then the expectation on when we could see a recovery and how strong that recovery could be, we have also now seen China reporting some very interesting data, but what do you make of the possibility of a recovery given the kind of stimulus that has been given?

Sneader: We have to understand that the stimulus in many respects focused on two different tasks. One task is simply bridging, a bridging between where we are until people can literally get back to work and I think that is different from stimulus in terms of where you can stimulate demand and both need to be considered.

But really ultimately what is going to drive the economic recovery is part of the health solution. How quickly we are going to be in a place where people feel comfortable and safe both in terms of going back to their work, but also in terms of customers being willing to go to a restaurant, get on an airline, do all the things that have been disrupted because of the challenge we face . The longer we are in a position where that confidence and uncertainty persists then the deeper the impact economically.

It is why when we have done a series of surveys of business leaders around the world, we find ourselves in what I would call a muted recovery in other words the whole alphabet has been explored. You have heard people talk about ‘L’, ‘V’, ‘W’, ‘U’, I think we are much more and the executives we interviewed think we are more likely to be in a place where it looks a bit like that well-known athletic move where it is a swoosh, in other words it is a sharp down and then a long slow recovery with some bits and bumps in between, I think that is where we are headed.

If you believe that then even in that scenario we are talking about quarter three of 2022 before we get back to the kind of GDP levels we had before this all got underway and I think that is a more realistic frame in which we can discuss things rather than sharp ‘V’ shaped recoveries. We are trying to extrapolate too much from early data and trend.

Q: What about India, what are you going with in terms of demand revival and recovery?

Kumra: I think how demand and consumption will recover because that is the biggest uncertainty in the short term. I think the general sense one gets is that, this quarter is going to be horrendous, I think we are looking at anywhere between 20-25 percent contraction in this quarter.

Impact will vary a lot by sector. If you happen to be in grocery, retail or even pharmaceuticals, I think you are in a pretty good place, you are struggling to keep up with demand by and large even though there, there is going to be a short-term blip. On the other hand, I think there vast segments of the economy that have come to a grinding halt.

So, it is very hard to predict. I think part of it does depend on how faster consumption comes back. I think lot of the reforms that have been announced will have an impact in medium to long term but I think in the short term there is still a lot of uncertainty around how these sectors will come back and pickup.

One other thing is execution. A lot of the things that have been talked about last week in the stimulus package and even otherwise for folks like us who live in India, many of these ideas, not all of them, some of them have been talked about for quite a while, I think the key today is now ruthless execution.