The Markets Enter A New Phase Of Volatility
While markets consistently enter and emerge from periods of volatility, the current phase has slightly different characteristics
On Episode 733 of The Core Report, financial journalist Govindraj Ethiraj talks to Suhail Nathani, Managing Partner at Economic Laws Practice as well as Paul Jeruchimowitz, Senior Managing and GCC Practice Lead at Accenture.
SHOW NOTES
(00:00) The Take
(05:09) The markets enter a new phase of volatility, clash of views.
(06:03) Rupee hits an all time low as the Reserve Bank steps back.
(08:43) American oil producers could struggle in a $60 oil world.
(10:44) What will companies have to do to comply with the New Labour Codes?
(22:10) What does it take to set up a GCC?
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NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Monday, the 24th of November, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.
The Take
I asked a former head of the Indian Space Research Organisation, ISRO, why all things constant, India's space programme has much to show and boast of as compared to our efforts in defence, which, to put it mildly, has struggled in comparison. His answer was a smile and a question in return, which I could paraphrase as, why do you think so? So whether it was bureaucrats or bureaucracy, the answer was in many ways self-evident.
Everything has context. ISRO was created by Vikram Sarabhai, a gifted physicist who hailed from a successful business family in Ahmedabad. India's first aircraft manufacturing firm, Hindustan Aircrafts, was also set up by a businessman in December 1940 by Seth Walchand Hirachand as a partnership with the princely state of Mysore.
However, it was taken over by the government in 1942, which also took over full control in 1951. The company made aircraft for the Indian Air Force, as it does now. ISRO was always an arm of the government but has functioned then and now more autonomously.
Which brings us to the present. Last week saw Hindustan Aeronautics Ltd. manufactured LCA or Light Combat Aircraft Tejas crashing at the Dubai Airshow.
The Dubai Airshow is considered the third largest after Paris and UK's Farnborough. Now the reasons for the crash, which saw the unfortunate demise of Indian Air Force pilots, are not clear right now. But what is clear is that the fighter jet, which was on display for export orders too, is not likely to see a rush for them, at least for some time.
The second and most important fact is that the LCA Tejas programme only highlights once again what India has lost by not privatising its defence sector earlier or, conversely, not letting Hindustan Aircrafts continue as it was set up. Now all of this is of course perfect hindsight. But the long-term damage of weak leadership in defence production and the strategic approach to is hurting us.
The Tejas programme began in the 1980s even as India tried to replace the old Soviet-origin MiG-21s, the last of which actually went out only as recently as September. The government-owned HAL has 180 of these advanced Mk-1A Tejas variants on order domestically but is yet to start deliveries because of engine supply chain issues at GE Aerospace, according to a report in Reuters. Now LCA Tejas is described by HAL as a 4.5-generation all-weather and multi-role fighter capable of offensive air support, close combat, and ground attack roles apart from ground maritime operations.
It would seem though that the aircraft has actually not participated in any of these situations in a real-life combat environment, which would obviously stress test the capabilities of man and machine. Shekhar Gupta, the editor of the print, wrote in his column over the weekend that the project has been caught in a seven-decade technology race. It was cleared in 1983.
It took another 18 years to take its first flight, having been named Tejas by then Prime Minister Atal Bihari Vajpayee. It took another 15 years for initial operational clearance, another four for full operational clearance, and the story continues. He writes, now the unfortunate part of the story is that we've tried to import substitute in an area where we could have or maybe should have done better by just importing the best in the world.
Remember your enemy does not award you brownie points for turning up in a homegrown product. And of course, importing defence equipment of any kind is fraught with political risk, but that's not the reason to not do it. Now, defence analysts, of which there are many, are better qualified to go into why we don't have state-of-the-art fighter jets or equipment, but the Dubai crash only highlighted the need to speed up and or let go.
To be fair, India has increasingly brought in private sector participation into defence, particularly in recent years. Many private drone companies, for example, supply to India's armed forces. So on the other hand, the use of drones in warfare is something that no one could have predicted, at least of all, all the Indian drone companies who started out building for applications like surveillance, mapping, and agriculture.
But it does feel sometimes like there is a long way to go in defence production and high-tech manufacture before catching up, unless the parameters of war change completely and we leapfrog by default rather than by design. And some of that has happened. The Hindustan Aeronautics website defines the LCA Tejas as dimensionally smallest with an excellent flight safety record and a remarkable achievement of accident-free flying.
The website may or may not get updated post the unfortunate Dubai crash, but hopefully our approach to defence in the literal sense will.
And that brings us to the top stories and themes…
The markets enter a new phase of volatility and a clash of views.
The rupee hits an all-time low as the Reserve Bank steps back.
American oil producers could struggle in a $60 oil world, which could also mean good news for countries like India.
What will companies have to do to comply with the new labour codes?
And what it takes to set up a Global Capability Centre or GCC?
A New Phase
We're in a new phase of volatility now. While markets consistently enter and emerge from periods of volatility, the current phase has slightly different characteristics. In the US, it's really about whether you believe the artificial intelligence investment boom has legs or not.
Those who believe it has are buying, those who do not or are unsure are selling, quite simply put. There are many smart people on both sides. Incidentally, including many who are questioning how much of Nvidia sales numbers are real or how long their chips will really last.
In India, the volatility is a clash between strong macroeconomic fundamentals versus the still early signals of an earnings and demand revival. But in India, again, it's suppressed by the fact we're yet to see clarity on an India-US trade deal, which is creating a sentiment overhang, not just for markets, but for businesses too. Remember, you can't be investing in expanding capacity if you're not fully sure where the tariff war is finally ending up and in whose favour.
And even if the markets appear buoyant, the currency markets are perhaps a better reflection of cross-border stress. The Indian rupee incidentally hit a lifetime low on Friday. And Reuters described it as a combination of portfolio outflows, uncertainty over the India-US trade deal, and a pullback in the Reserve Bank's defence of a key level.
The rupee fell to Rs.89.49 against the US dollar, which was going past or went past its previous all-time low of Rs.88.80, which was hit in last September. To return to the clash of views on Wall Street, a Wall Street Journal article summed up this pretty well. It points out how Nvidia and Microsoft pledged to invest $15 billion between them into Anthropic, the No.
2 large-language model developer or LLM. In turn, it promised to buy $30 billion of computing capacity from Microsoft using Nvidia chips. Now, this sort of circular deal had led to a nice bump in all the stocks involved in the past, but this did not happen last Wednesday.
Also, it says, Nvidia's better-than-expected results were hailed by many investors and commentators as proof that there isn't an AI bubble, and the stock jumped more than 5% on Thursday morning, while smaller AI-related stocks also rose. But it only took until that afternoon for people to realise that the argument was, in the Wall Street Journal's words, daft. Sure, Nvidia is selling a lot of chips, but that's an essential part of the infrastructure spending in the faking it stage, that is, faking it before you make it.
And if there is a bubble, that's exactly what you should expect. So the stock closed down with a price swing not seen since the April tariff sell-off. Now, Trader Psychology, it says, flipped on Thursday from the buy-the-dip to sell-the-rip, which is unpleasant for markets, especially as upward momentum turns downward, according to the Wall Street Journal.
So obviously, all of this is to give you a background on how the markets are split or even, you could say, polarised. Meanwhile, Indian stocks were lower on Friday, with the Sensex falling 400 points to 85,231. The NSE Nifty 50 was down 124 points to 26,068.
And maybe this week, we'll see us heading back to the all-time highs that we last saw in September 2024. But let's wait. In the broader markets, on Friday, again, the Nifty Mid Cap 100 and the Nifty Small Cap 100 indices were also under pressure, closing lower by 1%, or rather 1.1% and 1.2% each.
Energy
And here's the energy segment supported by India Energy Week. Oil prices were down on Friday to settle at one-month lows as the US pushed for a Russia-Ukraine peace deal, which could lead to more global oil supplies. Brent crude futures were down 82 cents to close at $62.56. US West Texas Intermediate was down to about $58.
And that figure is important, as we will shortly explain. Now, both crude benchmarks are down about 3% for the week and at their lowest since October 21st, according to a Reuters report. Market sentiment, of course, turned bearish after that peace plan for Ukraine and Russia, while sanctions on Russian oil producers Rosneft and Lukoil were to take effect on Friday, which they did.
Reliance Industries announced on Thursday that they stopped importing Russian crude oil for its Jamnagar export-only refining unit. And that move was, of course, in response to US sanctions on those oil producers, that's Russian oil producers, which kicked in on Friday. Meanwhile, an in-depth and interesting Reuters report from the Permian Basin, which actually spans Texas and New Mexico in the United States, says firms who supply to larger oil companies are already finding it difficult to earn a profit as crude hovers around $60 a barrel, signalling bigger economic woes on the way.
The report also says the largest US oil field has weathered previous downturns, but President Donald Trump's policies have added to the slide in per barrel profitability of US producers, who are already stifled by rising output from the Organisation of Petroleum Exporting Countries and its allies, as well as the biggest wave of consolidation in a generation. Now, all of this should obviously keep oil prices somewhat down and definitely amenable for countries or importing countries like India.
New Labour Codes
The government on Friday implemented four new labour codes in what is being positioned as the biggest overall of workers laws in decades.
The new codes are another step in hopefully making it easier for India's manufacturing sector to compete more effectively in a new high tariff world with unpredictable trade flows and developments. The Prime Minister Narendra Modi said that it will build a future-ready ecosystem that protects the rights of workers and strengthens India's economic growth. Now, the new codes are aimed at simplifying rules, improving worker protection and liberalising conditions or investment.
Some of them date back to British colonial rule and have been seen as a hindrance to India's manufacturing sector, which contributes about 17% to India's roughly $4 trillion GDP, but has the potential to go much higher. The Ministry of Labour and Employment said they had rationalised 29 existing labour laws. And the new codes cover social security, minimum wage benefits, longer factory shifts and night work for women and raises the threshold for firms requiring prior approval for layoffs from 100 to 300 workers, giving companies greater flexibility in workforce management.
They also define gig and platform work for the first time, expanding legal and social protection to workers outside traditional employment structures. The new rules, while welcome, will also raise the cost of compliance for smaller enterprises. And it would also seem that there is still a more than desired element of criminalisation in these laws that effectively put the threat of jail for sometimes fairly ordinary infractions.
I spoke with Suhail Nathani, managing partner at law firm ELP, who works across regulatory securities law, trade and competition laws. And I began by asking him what companies will have to do to comply with these new laws.
INTERVIEW TRANSCRIPT
Suhail Nathani: Insofar as this reform is concerned, I think it's long been awaited. We welcome it, not only on behalf of employers, but also on behalf of workers. It gives everybody a lot of clarity.
It gives everybody a lot of security, both in terms of contractual and legal security, safety, of course, minimum wages and benefits. So, absolutely delighted to have this important reform in the ease of doing business bouquet of reforms, if you will, in India. So, very, very happy to see this come out right now.
Govindraj Ethiraj: So, what would you say are the most significant in terms of the way things will be different for companies, before we come to what companies have to do?
Suhail Nathani: Sure. So, one, companies have a lot of clarity. Two, costs may go up, but it is a small price to pay for the clarity that you have.
You can have fixed-term workers, you can have long-term workers, you know exactly what you have to pay them, you know exactly what their rights are. And the way this code is drafted, and I must applaud the government for that, is that this code has a whole new mindset on compliance. So, the authority is a compliance and inspector.
It's both. It's not just an inspector, which is out there to find fault with It actually has a conciliatory approach to this. Second, even the criminality of these statutes have been reduced.
They are clear that if you don't pay minimum wages, if you eat up the social security, you have criminal consequences. However, the first offence is not criminal. It can be compounded by the payment of a fine.
And this can happen once in five years, but I think it's a great new approach for the authorities to interact with industry.
Govindraj Ethiraj: Right. And would you say that these are amongst the most significant changes?
Suhail Nathani: Indeed, undoubtedly, because, Govind, as you are aware, labour laws have been complicated. Compliance has been hard. Importantly, litigation has been long, and neither the worker nor the company benefits.
Eventually, the one who has the most staying power benefits, and that's usually the company. So, this is a win-win, I think, for the workers first, and two, for the company, because they know exactly what their liabilities are, and they just need to go out, comply, and it brings a great deal of clarity. Another interesting aspect I want to touch upon, Govind, is that the central government, of course, this is on the concurrent list of the constitution.
So, both the state and the centre have powers. The central government is putting a minimum wage. Each state can raise that amount.
So, in a healthy sort of way, it will create a good competing environment between states without, honestly, sacrificing the worker.
Govindraj Ethiraj: Okay. So, if you were to look at the kind of changes in statutes, two questions. One is, all states have to fall in line or will fall in line with these new regulations.
So, therefore, the way they're applied or could be applied, I'm assuming, is not consistent, or at least for the time being. Second is, what do companies have to start doing to prepare for this in the next few weeks or months?
Suhail Nathani: So, first, the companies need to relook at their own existing structure. These four codes subsume 29 codes. So, you have to run a diligence to figure out where the impact is.
You need to wait for the state government regulations, and you need to start implementing them. They apply broadly. They apply deeply.
So, they cover migrant workers. They cover temporary workers. And I said before, there is a inspector cum facilitator for compliance.
So, you have the ability to reach out to the authorities and ask the relevant questions, even as you're building your own compliance. Of course, from a company's perspective, the biggest impact will first be how to comply with the law and be the financial impact.
Govindraj Ethiraj: Right. And at a very broad level, if you were to look at the number of compliances a company usually has to go through, particularly if it's a manufacturing firm, and that runs into thousands in many parts of the country for many industries, do you see all of that coming down? Number one.
Number two, labour laws itself has been one of the biggest issues with Indian industry as, let's say, a potential hurdle to, let's say, ease of doing business. So, does this address all of that?
Suhail Nathani: So, no. On compliances, this is just one aspect. This is labour, safety, social security.
Insofar as the labour compliances are concerned, it brings a lot of clarity. And the compliances may be more, but as long as you know what you need to do, companies don't mind doing that. So, I've not gone and counted, you know, how many compliances under each act.
But certainly, there is a lot of clarity. Insofar as your second question is concerned, it is just one step on a long journey to make ease of doing business a reality. Every state will have its own populist pressures.
There will be different compliances. There are different statutes that apply to a manufacturing space. It could be an environmental law.
It could be fire and safety, which are local compliances. So, there will still be a little bit of give and take between states and central laws. But it's a very welcome step for the long-term future of this country's ease of doing business and growth in employment.
So, a lot of people were previously afraid to enter into agreements because, you know, I'm taking on more people. I will have a problem. How will I get rid of them if I don't need them?
All that is covered. You can do short-term employment. You know what you have to pay.
The workers know their rights. There is also, in a somewhat critical sense for the workers, there's not that right to strike that easily. There is a process before an undertaking can go on strike.
There's recognition of worker unions, but clearly, it comes with responsibilities for them.
Govindraj Ethiraj: Last question. So, again, I'm bunching two. One is, some of the trade unions have already opposed this.
So, do you feel that that could be an issue for the kind of companies that you work with, in general, that is? And the second is, could all of this increase compliance costs sharply for companies, particularly smaller companies?
Suhail Nathani: Okay. To first address the trade union issue, trade unions play a very important role in every society. They are critical, as you say, of these reforms.
But honestly, any change in status quo does not suit the entrenched incumbents. Over a period of time, as they function under the new laws, I believe they will play an even greater role in benefiting the workers they represent. It will give them a lot of clarity on what they need to do for the workers.
And the law gives very clear rights on this to workers and to trade unions. So, yes, I respect trade unions. B, I understand that there is a change of status quo, and that doesn't suit incumbents.
But I think with cooler minds and more time, people will understand that this is for everyone's benefit. And trade unions will be able to do their jobs more effectively. Second, in terms of small businesses' compliance, I believe that most businesses, if not all businesses in India, don't mind incurring a higher cost if there is certainty on compliance.
So, I'm not belittling the financial impact that it will have on small and medium businesses, but it will take away a whole bunch of worry of long-term litigation, of unknown liabilities, of court orders which may take years to show up and have retrospective effect. I think all in all, small and medium businesses will benefit the most because it gives them a lot of flexibility on how to hire employees. There is a platform worker, there is a gig worker, there are various definitions of workers, and each one of them has clarity and is covered under this act.
Of course, there is only one definition of worker under the codes, which is also welcome.
Govindraj Ethiraj: Right. Suhail, thank you so much for joining me.
Suhail Nathani: Thank you, Govind. Always a pleasure chatting with you. Thank you for having me on the show once again.
Setting up a GCC
India is home to about 1800 global capability centres representing about 55% of the global total, according to a report from Now, these centres employ about 1.9 million professionals and contribute about $65 billion in exports. Looking ahead, the GCC footprint in India is projected to grow to about 2400 centres in about four years, creating employment for 2.8 million people in all and generating about $110 billion in economic value. Now, the GCC advantage has also led to considerable nimbleness by many corporations and their partners in setting up shop quickly and scaling up almost like a startup among many other approaches.
Interestingly, many GCCs also set workplace and culture standards for their global parents. I caught up with Accenture's Paul Jeruchimowicz, senior managing director and GCC Practice lead. And I began by asking him what it would take or what is it taking to set up GCCs today.
INTERVIEW TRANSCRIPT
Govindraj Ethiraj: Assuming the first GCCs that were set up were set up slowly, as in there was a gentle process of disengagement or re-engagement from mothership and the GCCs in India began to maybe set up and maybe I'm sure it was driven by leadership as well or local leadership. Are you seeing today much faster, let's say, setting up time much faster, hiring and much faster acquisition of talent? Really, my question is, how is this process of speed different from what it was earlier and at least are you able to change that?
Paul Jeruchimowitz: Yeah, so very much. Dramatic difference because of the various ways that models have merged from what used to be a choice to a merger of models and also some alliance partnerships that really drive acceleration. So just for example, I worked with a client who had a lot of experience.
He was at a kind of a technology company, then he was at a snacking company, then he was at an industrial products company, all had a lot of experience in this space and then he went to a retailer and at first thought, hey, there's no way in our culture we would ever have a global capability centre and then he visited and got an understanding that today we have pay-as-you-grow models, incubation spaces, partners where you could park through an SPV or a SPAC, a legal entity that then becomes transferable with more expedited time frame.
There are examples today of GCCs. We used to have this mindset that you had to have at least 500 or at least 250 or some scale to get started. Today we have examples of GCCs of less than 10 that are proving a concept in an incubation space, no regrets.
If it doesn't work, you close, no problem. If it does work, you scale into your own spaces. So much more flexibility in these models that are less capital intensive, allow you to get started quickly from there, scale the talent quite rapidly.
So we have some that we've seen in a matter of weeks or months where it used to be many months to a year.
Govindraj Ethiraj: Right, and the concept of incubation in this context is quite fascinating. And are you right now, as we speak, incubating many such ventures?
Paul Jeruchimowitz: Yeah, so and this comes through an alliance partnership we have that I think is maybe well known in the market that there are, I'm trying to think of a best example, but a few clients that I visited this week that started in the shared incubation space, maybe in the 10 to 20. These are the ones that are coming to mine are both retail. It is starting with technology tech first, but tech for business.
So it's technology that's working alongside merchandising or working alongside development of a consumer app or a loyalty programme, starting small like that in this incubation space. It's a no regrets move, because it's the pay as you grow concept. Also, what we're finding in some of these transformations that maybe takes, you know, the full transformation, which should be always on, but it does take 12 or 18 or 24 months.
This within three months creates an option for leaders that might have maybe, again, they're constrained with talent, and they want to hire more right away, or they have a budget challenge that they want to address right away. While other big decisions are being made, there's a GCC that they can start populating. So it also becomes a change management enabler to get leaders to start trying and experimenting within the GCC.
So those are some examples that are starting in the 10 to 15 range of headcount. And in the meantime, their permanent space is being developed. And over six months or nine months or 12 months, they move out of incubation into the permanent space, of course, assuming the things that are incubating are delivering the value they expected.
Govindraj Ethiraj: Let's talk about talent, then, since you touched upon it already. Now, talent accretion and then subsequently enrichment is a process. Now, from your own experience, what's the best way to go about it?
How are, let's say, the successful GCCs going about it or have gone about it? And what are the lessons in doing so? So we've talked about time, and you've explained how it can be really crunched now and is being crunched.
What about the people and the people-linked processes that drive all of this?
Paul Jeruchimowitz: Yeah, so it's important in all of these GCCs to have a focus and room in your business case to spend time and money on the EVP, so the employee value proposition. Not only making sure that the market is aware of your brand, but in particular, the type of work that people in the GCC would be asked to perform and how that contributes to the overall value or mission or purpose of the company. Super important.
So it's not so much that I'm working at this retailer, but what work am I doing at the retailer? I think part of that, too, is back to a comment I had made earlier about making sure that the GCC has the right work within it. A lot of times, the headquarters, and again, if it's Europe or America, will say, well, do we have a brand?
Or maybe we don't have a brand, and how will we be able to attract the best talent? What we find is that it's not actually about the name of the company. It's about the type of work that the people are being asked to perform, and there's many examples of companies in the U.S. that I've never heard of that have thriving GCCs. In fact, they're hiring from some of the best product engineers in these companies I've never heard of because of the kind of work that they're being asked to do. But the flip side of that is to make sure that the GCC has the right work in it and we're not asking for a GCC to do routine transactional work that might be best served by a managed services provider. We see this in some of the attrition data that a GCC that places, or GCCs on average, have good attrition numbers, in many cases lower than managed services, but when they start to put the transactional work inside of it, you see ballooning attrition in the 30s.
The type of work that you put in is super important, and then that translated in the EVP and branding that I had mentioned, you know, as a way to attract best talent.
Govindraj Ethiraj: Right. So right now, as we speak, there is a lot of work going on by major corporations, as you said, setting up GCCs, some of them doing it as captive incubations and then slowly expanding or simultaneously, you know, incubating and setting up their permanent setup. How is the talent war in all of this?
And I mean, you talked about, of course, making things interesting for people and therefore ensuring that they stay on, but how easy or difficult is it to find people for some of these industries that we've talked about right now?
Paul Jeruchimowitz: Yeah, there are many examples. A life sciences company that I worked with that had targeted 2,600 in their GCC in Hyderabad within one year time, and they're already at 3,500 because of the demand and proving back, well, the demand from the business, but also the success they've had in the market. There's a retail GCC that has ambitions to grow to 4,000 and 1,000 in one year that hired 385 in the first two to three months.
And so there does seem to be evidence that the talent is available with the right processes and EVP to, again, attract the talent. The more and more the GCCs are moving up the value chain and to really core distinctive work for companies, there have been some roles that are difficult to get, you know, difficult to access, difficult to get, you know, that maybe do remain open longer than the headquarters would like. So that does happen in some specialised spaces.
And of course, the ecosystem seizes and works together to try and fill it. You also find maybe some of the wage covering some of those difficult to get positions by increasing wages, right, where the clients are willing to pay or the companies are willing to pay above market, you know, to attract best talent into those roles.
