A Shot In The Dark

Tempering Optimism

• Companies: Profit margins at seven-year lows, forecasts are discouraging. Hiring freezes, some jobs cuts have begun. Some investments are on hold.
• Consumers: Demand has slowed for vehicles, homes, fmcg products. Though wages are higher, both employers and employees are battling inflation.
• Euro Crisis: The European meltdown expected to intensify in 2012, adversely impacting financial industry. Exports and realty sectors definite casualties.
• Govt Finances: Battling a deficit of 5 per cent, government cannot afford to throw money towards improving growth.
• Inflation: Government now claims it’s on the way down, but past official predictions have been proved wrong. For now, interest rates have peaked.
• Rupee: The depreciating rupee will increase import bill, putting pressure on the fiscal deficit. May not impact inflation, but will hurt growth for sure.
• Reforms: An increasingly concerned government is trying to send out the right signals to boost the downbeat mood.

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You know the world’s changed when the conference circuit’s worries expand to malnourishment in junior staffers, when analysts mock a slowdown and ministers want to forget the ever-looming threat of inexpensive Chinese imports. “It’s a different world,” agrees Jagannadham Thunuguntla, strategist and head of research at smc Global Securities. “But has India’s economy readjusted to this new world? I don’t think so.”

The despair on the business and economy fronts is all-pervasive, and it’s not hard to understand why: the rupee is losing value, exports are slowing, the deficit is expanding, some firms are cutting expansion plans, inflation refuses to be tamed and the Eurozone may yet implode. “Judging by the overwhelming signals of doom, the India story looks like it’s just that—a story,” Thunuguntla says. Many observers are concerned that the mood is such that a series of events could take us back to those dark days of 2009.

Topping off the state of unease is governance—or, to be more precise, a lack of it. It is clear that the finance ministry, the Planning Commission and the Economic Advisory Council have not got their projections on growth quite right. The RBI, in its latest credit policy, says it expects 7.6 per cent growth in 2011-12. Analysts now say that they will be comfortable with a more conservative estimation. “We cannot ignore the possibility of growth below 7 per cent,” says Standard Chartered Bank’s regional head of research, Samiran Chakraborty.

In a decelerating world, wouldn’t even 7 per cent appear tolerable? Some fear not. “Most expansion plans of Indian firms account for GDP to grow by 8 or 9 per cent. In response to a volatile and depreciating rupee, they have displayed lacklustre performance,” says Salil Bhandari, president of the phd Chamber of Commerce and Industry, referring to India Inc’s profit margins, which hit a seven-year low in this financial quarter.

Businesses dependent on imports expect a further dip while the government does not think exports, which saw its growth rate fall to 10.8 per cent over October 2011, will recover in the next six months. The lone bright spot is the domestic market and the expansion of the export market (16 per cent of the GDP at present) to new geographies—a trend visible over the last decade and likely to cushion India from the slow European and US economies. If that registers a sense of deja vu, recall that similar statements were made three years ago.

In an attempt to check high inflation—which has been hovering at 9 per cent through 2011—the RBI has hiked interest rates. This has had little effect other than adding to a growing certainty that it has slowed down industry. Commodity prices remain high on global cues, adding further to industry’s woes. The government’s response has been to wait and watch. And admit, like Montek Singh Ahluwalia and Kaushik Basu did recently, that they have erred in predicting inflation would fall to acceptable levels.

There are two key differences between ’11 and ’08. The current economic slowdown is not a big bang; it has, rather, crept up on us stealthily. Consequently, firms have had a chance to tighten their belts over time. “There may not be drastic job losses if companies are forewarned and prepared,” believes Chakraborty.

On the flip side, the earlier crisis was marked by big government support in the form of pay commission arrears released just in time to buoy demand and a farm loan waiver as well as an assortment of tax breaks for industry (which are being phased out). This time, those big breaks may be missing, as finance minister Pranab Mukherjee has acknowledged that the target of fiscal deficit at 4.6 per cent of GDP is tough to achieve.

The response has been to reform—fdi in multi-brand retail has finally been cleared by the cabinet as has the complete opening up of single-brand retail to fdi—even as political consensus remains elusive and caveats put a question mark on how attractive foreign retail will find India. With Parliament frozen by protests, the UPA is using the threat of a crisis to push key reforms through. Sure, this move will boost sentiment, and give the beleaguered government, accused of not taking action, some breathing space.

“The noise against organised retail is at odds with reality. Less people now work in unorganised retail trade, while new evidence shows these people aren’t moving to organised retail either. This is unacceptable in a country where educated youngsters desperately need jobs,” says Santosh Mehrotra, director general of Institute of Applied Manpower Research, a government agency. His new, soon-to-be-released research finds that unorganised retail employs 5 lakh less people today than it did a decade ago. Meanwhile, organised retail started and ended the decade with 1.7 million employees.

While government nervousness has been on the rise in recent months, besides FDI, it faces immediate pressure to clear pending bills and wait for their impact in years to come. It’s almost certain that the government will be put to the test in attempting to bring inflation to more manageable levels by March.

There’s also the risk of other big-ticket expenses, such as on subsidies, or another dramatic world event. “I think the India growth story needs to be revisited although at its very core it remains sound and difficult to question,” says Abheek Barua, chief economist at hdfc Bank. And there’s worry about a lag effect. “The real impact of the slowdown will take place in the next fiscal,” says a senior analyst with a mnc brokerage.

That is why the government has repeatedly offered a positive view of the economy’s immediate future: it may be a viewpoint tinged with optimism, but then there is little else to go with.