Business

Holding The Graph Down

The problems of India Inc are linked to our structural flaws, not to daal-chawal woes

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Holding The Graph Down
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In a country still celebrating its ability to withstand global financial turmoil, premonitions of calamity have been sensed lately. From the local sabzi mandi to corporate boardrooms, there’s talk of how the economy, and household budgets with it, are falling off the edge. India Inc has raised a series of spectres over the last three months: about rising input prices and interest rates eating into budgets, undercutting profits and sluggish domestic consumers failing local enterprise.

Such is the hullabaloo that Union finance minister Pranab Mukherjee was forced to step in on Wednesday with an out-of-the-blue press briefing in which he clarified that the “fundamentals of India’s economy are strong”. “There have been fluctuations over the last nine months, and inflationary pressure...particularly on food. (But) in a complex, large economy, this type of periodic fluctuation is not unusual,” he said.

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In the end though, corporates beat their own performance during all of last year. This quarter’s earnings growth of 25 per cent was “decent” if not “stellar”. Still, the mood just won’t lift. Ask any market analyst about the outlook for the next two quarters and you won’t be pleased. Sachidanand Shukla, chief economist at Enam Securities, says there are “headwinds on the macro side”. The government has not been able to control inflation, he points out, in addition to the current account deficit reaching a two-decade high. Both are linked to structural issues, Shukla says, meaning they are not cyclical changes. His prognosis is grim: “Investors are taking their money elsewhere, to economies showing more promise, like Brazil, Taiwan, the US.”

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Sure, all is definitely not well on Dalal Street. The Bombay Stock Exchange has  registered a 12 per cent dip since January 2011. “Three things drive the market—money, sentiment and hope. Last year, there was a dearth of money flowing in, valuations were skewed and we knew that wasn’t sustainable. Now, with inflation, with input costs and interest rates rising, and with other economies like the US looking promising, foreign investors are pulling out their money,” argues Arun Kejriwal of KRIS.

Again, the outlook turns from good to terrible—unusual for the second-fastest growing economy, which recently projected 8.5 per cent GDP growth. Jagdish Khattar, former ceo of Maruti Suzuki, says Indians tend to misdiagnose their maladies. “When we feel a little better, we go to town saying we’re on top of the world. And if one thing goes wrong—say inflation, or fdi—we talk of gloom and doom,” says Khattar, who now runs Carnation, an auto service company.

That said, India has taken some recent hits. It turns out that India is the only significant economy in Asia to which FDI inflows have been falling after a bullish phase late last year. Between April-September 2010, FDI flow to Hong Kong, Singapore and China increased by 30 per cent, 122 per cent and six per cent each; but flow to India fell by 36 per cent.

At the same time, in January 2011, news spread of the Philippines “beating” India in the call-centre race. The Everest Group, a US outsourcing advisory firm, said that the Philippines’ call-centre industry will overtake India’s this year. India also seems to have lost its grip on a number of top slots, achieved in pre-downturn times, such as the top retail market, which it lost to Vietnam last year, and the top apparel exporter slot, now occupied by Bangladesh and Vietnam.

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A recent survey of Asian countries by the Hong Kong-based Political & Economic Risk Consultancy says India has the worst regulated business and political environment. This has to do with wider “India problems”, not just inflation or FDI or losing plum positions in textiles or tea exports. These are: slow pace of reforms, red tape, lack of stable policies. However, Khattar warns against taking refuge in easy answers. “We’re not a perfect economy, but then no economy is. Think of the many Indian companies, including BPOs, that are now happy because the US is recovering and their clients are doing better,” he says.

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Neville Dumasia, who heads KPMG’s  risk, compliance and governance practice in India, says Indian businessmen are beginning to acknowledge that their reputation abroad has taken a hit. For one, India has lower regulatory compliance costs than the West. But, because of lack of enforcement and monitoring “through politicking, corruption, speculation”, the costs here add up. “Also, while some companies follow regulations, others don’t. That gives the impression there’s no level playing field. Else, we’d have spectacular growth,” he says.

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This tension could explain why 13 well-known Indian businessmen and noted figures wrote an open letter to the Centre about “governance deficit”, almost challenging it to confront corruption. The other reason for the apparent panic, says Janmejaya Sinha, chairman, Asia, Boston Consulting Group, is that the India of times before the global economic slowdown is significantly different from the one today. “Demand for healthier foods is driving up food inflation, but that’s a standard event in any other emerging economy. I don’t see how that should impact corporate sentiment, or even the condition of airports, power supply, or roads. The fact is: ‘What’s new?’ Maybe the corporate mood is animated by other spirits not as easy to explain,” Sinha says.

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In Davos, Indian participants were busy talking about the Asian inflation, US jobless rates, and European debts—corruption didn’t really make it to the top. What did turn up was good news: the ‘China’ story has now been replaced by the ‘India-China’ story. “There’s no way growth will be below 8 or 8.5 per cent, though fdi is a concern. To my mind, India’s growth story will continue for another 15-30 years,” says Sinha.

So, what’s worsened the mood “in a very fuzzy or indirect manner” is the lack of policy decisions, explains Abheek Barua, chief economist, HDFC Bank. “That’s been pieced in together with the usual cyclical downturn that we were expecting to see.” It’s true, things do look worse in close-up. Sure, interest rates will rise further; and wealthy nations will seek more competitive destinations. But, at least for now, things are going fairly well, so we’re in shock.

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