The pressure point

For the first time in nearly four years, the economy is under strain. And everyone, from the small farmer to large companies, is feeling the burden.

The situation is grim. The big numbers say it. The captains of Indian industry reaffirm it. Most importantly, the
people who live it, day in and day out, feel it. About two months ago, the Outlook Business team fanned out across India to gauge the economic health of the nation. At two levels. The first objective, the short-term one, was to see whether people were better off or worse off than before. The second objective, the long-term one, was whether the nation was riding an economic wind that would blow the fruits of progress and prosperity to all, not just a fortunate few who happened to come in its way.
So, our team of reporters and photographers went out and met people, by the hundreds. We met them in the fields of Ropar district in Punjab, Navsari in Gujarat, Akola in Maharashtra, Hassan in Karnataka, Pollachi in Tamil Nadu, Hajipur in Bihar... We met them in the industrial clusters of Baddi, Moradabad, Ludhiana, Haridwar, Parwanoo, Durgapur, Surat, Coimbatore, Tirpur... We met them in swanky, blue-light offices in Delhi, Mumbai, Bangalore, Chennai... We met them in their homes, on the streets, in chai shops, on highway eateries, under the banyan tree, in the middle of nowhere...
We visited bicycle units, textile factories, brass and aluminium export houses, pharmaceutical companies, malls, bank branches, housing complexes... We met farmers, labourers, daily wage earners, unemployed, shop-floor workers, managers, CEOs, bankers, economists, consultants, policymakers, DSAs, exporters, job consultants, builders, village mukhiyas, ministers, distributors, wholesalers, kids... And the one nagging thought we came back with is this: the situation is grim and there’s work to be done.
The small squeeze
Three examples, representing the masses in two of the three pillars the Indian economy stands on, epitomise the recent deterioration in the state of affairs that is squeezing many, and making them worse off than before.
Poonabhai, a 50-something farmer, has been sweating it out on a rented 36-bigha land on the Surat-Navsari Road for the last 11 years. For all his labour, his landlord pays him Rs 2,000 a month. His grouse is not so much with his landlord, who has loaned him money in the past, but with the market economy, whose intended benefits bypass him. "My cost of all inputs—from seeds to fertilisers to pesticides—has gone up substantially in the last few months. I sold brinjals for Rs 40 per quintal and you buy the same for Rs 40 per kg," he says ruefully.
Unmanageable input costs is the refrain up North, in Ludhiana, India’s cycle-manufacturing town and home to mostly small- and medium-sized enterprises (SMEs). Manufacturers say runaway prices of steel has resulted in bicycle sales falling 20-25% between December and April. "A cycle needs 18 kg of steel. Our input costs have increased by Rs 270 per cycle, but we have increased prices by only Rs 165," says Charanjit Singh Vishikarma, Managing Director, Vishikarma Industries and President, United Cycle and Parts Manufacturers Association. If managing higher input costs isn’t hard enough, they also have to compete with cheap Chinese imports; steel costs 30% less in China.
Cheap Chinese imports are also turning the screws on SMEs in many other sectors like textiles, pumps, electronic items, even handicrafts that were the legacy of India. Says Shailesh Chandra of RV Handicrafts, an exporter in Moradabad: "A buyer is not attached to Moradabad brass or Indian art work. If he gets a similar quantity at one-tenth the cost of the original, never mind its quality, he is happy." It’s not just manufacturers who are affected by the Chinese deluge. Wholesalers are caught between staying Indian and seeing business dwindle, or start stocking Chinese goods.
That’s pretty much the story on the fringes. If it’s not input prices or the China threat or stiff competition, the fingers are pointed at crippling infrastructure, bad governance, corruption, government apathy—factors that have always existed in the matrix, but the side-effects of which get pronounced during difficult times.
The biggies are worried...
Besides taking on more burden in the recent past, the other thread running through these three stories is that they are about people who don’t have much of a voice in shaping their destinies or the resources to weather difficult times.
India Inc does, but even it is feeling the pressure. The mood is not as despondent as in the fields or in the small factories and workshops, but there is nervousness on whether the current bout of hardship is just a passing phase, or whether it could be of a more lasting nature and end up leaving a deeper bruise.
The circumspection is evident when one gleans from the numbers that showcase various facets of economic decision-making by households. Credit growth has dipped significantly in 2008-09. Housing loans, which grew by 25-158% in the last four years, had grown by just 9.1% in 2008-09 (till February 15). Worse, delinquencies are on the rise. Although numbers aren’t available to quantify the scale of defaults, anecdotal evidence from banks suggests that it is high.
Although realty prices have dropped, they are still high enough to be a deterrent to buyers; banks too, stung by recent reversals, have become conservative in extending loans. Similarly, because of the dip in the stock market, retail mutual fund collections are said to have dipped 30-50% since January. Elsewhere, the IT/ITES sector, one of the big employment generators in the country, is talking in euphemisms that basically mean it is likely to hire fewer people this financial year than in the last one.
Outlook Business, in partnership with the Confederation of Indian Industry (CII), polled 90 luminaries from corporate India on what lay ahead for the economy. The results of the survey corroborate the concerns we derived from our ground-up reporting (See box: The Going Gets Tougher). As many as 88% said their margins were under pressure. And, more importantly, nearly half of them admitted they were seeing a drop in sales and orders, a pile up of inventories and an increase in payment cycles—usually, the first signs of an economic slowdown.

There’s no doubt that India’s economic juggernaut will slow down. By how much is the question. And 63% of the respondents feel that GDP (gross domestic product) growth will fall from 9% in 2007-08 to below 8% in 2008-09; nearly one-fourth think it could fall to even below 7.5%.
Research houses too see a drop to the trend rate of 7-5-8%. Kotak Mahindra Bank has lowered its 2008-09 GDP projection to 7.8%, with a normal monsoon. Standard Chartered Bank has pegged it at 7.4% in 2008-09, with a bounce back to 8.5% in 2009-10. "The moderation in growth is a reflection of cyclical fluctuations, higher local interest rates and a slowing global economy," says Sucheta Mehta, Senior Economist, Standard Chartered Bank.
Morgan Stanley is the most bearish of the lot, projecting a growth of 6.7% in 2008-09. Chetan Ahya, Executive Director, India & South East Asia economist at Morgan Stanley cites three threats that can pull the country’s growth well below its potential: continuing rise in global commodity prices, strengthening of the dollar and consequent depreciation of the rupee, and continuing risk aversion in the global financial markets.
In the Outlook Business-CII poll, India Inc cited high oil prices and rising input costs as the two biggest threats. As many as 91% see crude at $100 a barrel or more in 2008-09 and 85% see inflation at 7% plus. Tackling such high inflationary pressures is going to be a tightrope walk for the Reserve Bank of India (RBI) and the government.
Increase in interest rates in major economies will reduce demand and, possibly, commodity prices, but this will happen over time. Reducing interest rates is not an easy choice to make given that growth is flagging and further throttling may be undesirable. Oil prices are another policy dilemma. There is pressure on the government to keep absorbing the burden, ruining its own balance sheet and that of the oil PSUs. Even if it manages to pass on the rise to consumers, as it managed earlier this month, it will fan inflation. The latest price rise could nudge inflation beyond 10%. "If the government erases the entire subsidy burden and passes it all to the consumer, inflation could cross 20%,’’ says Mehta.
...but remain optimistic
High oil prices and high inflation is turning out to be a bug-bear for economies around the world. As a recent World Bank report noted: "Measured correctly, two-thirds of the world population have double-digit inflation.’’ Such high inflationary pressures are sure to have an adverse impact. Business confidence has dropped, consumer demand has fallen, stock markets are taking a beating and governments are returning to era of protectionism to ring-fence their economies from the turmoil outside.
The biggest source of concern of the ‘turmoil outside’ is the US, which, according to The Economist, is slipping into "its deepest recession for several decades". It estimates the losses from the home mortgage crisis to be about $900 billion, nearly double that in the South East Asian currency crisis of 1997-99. It also describes the US housing boom as "biggest bubble in history’’, far bigger than the Internet bubble of 2000-01. However, while it predicts the demise of the dollar as the main reserve currency and the shrinking dominance of the US, The Economist doesn’t predict a world in crisis. Asia, it says, is more important than the US today as a driver of global growth.
Subir Gokarn, Chief Economist, Asia-Pacific, Standard & Poor’s too expresses this point of view. According to Gokarn, the mild US recession—growth dropped to 0.2% in the first quarter—is unlikely to have any dramatic effect on emerging economies of Asia, which are the new global drivers and have managed to de-couple themselves from the US economy. "The Indian economy is far more resilient today than it was during the last US recession of 2001 or even during the East Asian crisis of 1997," he says.
Gokarn feels the US recession might be a short-lived one—the economy should start looking up after October—because of the government’s ability to set in place the right mix of policies. Rate cuts by the US Federal Reserve will help shore up bank balances, and help them get back in the business of lending to corporates and individuals; plus, a "cheque in the mailbox" of individuals will also foster consumer spending.
Hence, any discussion on the state of the Indian economy should be studied from two perspectives. The immediate, which takes into account the cyclical nature of the Indian economy; the medium and long term, which looks at the structural changes that have come about in the Indian economy in the past decade.
So, the immediate future may look a little cloudy and uncertain. For instance, 40% of Indian exports go to the US and European Union. In case these regions go comatose, Indian exports, which grew a handsome 23% in dollar terms, will suffer. Says Standard Chartered’s Mehta: "Exports in 2008-09 are expected to reel under the triple whammy of a stronger currency later this year, correction in commodity prices and a slow down in trade with major trading partners."
However, over the long-term, the Indian growth story remains intact. "All debates about the recent slowdown is because we have been spoilt by the buoyancy of the past three years," says Gokarn. Indeed, if one steps back from the here and now, the mood is considerably more upbeat. Despite the tightening environment, 68% of the respondents in the poll said they didn’t plan to defer large capital investment plans. Says Mehta: "Although some negatives like a stronger currency, higher interest rates and restricted borrowing options can hit producers, a positive assessment of evolving demand conditions and underlying plans for expanding capacities should keep the engine chugging.’’
Crossing the hump
That’s at a big picture level. Down the ranks, for many SMEs, small exporters, wholesalers and farmers, it’s less a question of expansion and more a question of survival. Even among the more affluent, some belt-tightening and withdrawal is being seen.
In a sense, the Indian economy finds itself at a crossroads. There is a slowdown and the economy's constituents.
are feeling greater discomfort. The global upheavals are having a trickle-down effect. Demand is there, but it is flagging. How the economy responds to these challenges will shape the trajectory of growth and the nature of that growth—whether it is equitable, inclusive and sustainable.
For all the noise made by the UPA government, the character of this 9% growth is incredibly skewed. Neither are the rewards being broad-based nor are they gushing down to the people who need it the most. This was a common refrain among the people we spoke to. Many of them—from the landless unemployed who are getting short-changed under the NREGS to exporters facing the brunt of an appreciating rupee—expressed dismay at the general apathy towards their plight.
In order to ensure that India’s growth story remains sustainable, policy, industry and society need to ensure four things: move the excess people out of agriculture by providing them alternate employment; create world-class infrastructure; improve public services such as rural healthcare, drinking water and sanitation; improve the quality of governance. Otherwise, the disparity between the urban rich and rural poor will continue to grow, resulting in huge social tensions. And that is something the country can ill-afford.

Source : Outlook Business