The State of India's Economy

Posted December 8, 2008

The terror attacks that held the financial and commercial capital of India, Mumbai, hostage, last week, came at a time when the Indian economy and Indian businesses were already struggling.

Just a few days before the attacks, and in response to views by economists that India was on the verge of a recession, Finance Minister, P Chidambaram, insisted that the Indian economy was not in a recessionary mode. He claimed that a 7% growth rate for the current financial was achievable. Prime Minister Manmohan Singh suggested the same and tried to keep the debate on India’s economy focused on growth projections which had dropped to 7% (per annum) from 9% figures issued earlier in the year.

What the prime minister and finance minister wished to ignore is India's high rate of inflation, which has averaged around 10% through this year. What they also chose to keep out of focus has been the depreciating rupee. It costs an Indian almost 50 rupees for a dollar. At the beginning of the year, the rupee was firmer at 39 rupees to the dollar. Economists have been arguing that a recession need not be determined entirely by the rate of growth. Factors such as inflation, consumption patterns, creation of jobs or the lack of them, are also aspects that need to be assessed.

The bottom line is that the India growth story has taken a beating. The past few months has seen more bad news than good. Industrial production dipped to as low as 1.3% this August as against 10.9% in the corresponding period of 2007. Foreign institutional investors pulled out close to $15 billion in the past few months leading to the stock market crashing from a high of 20000 in January to around 9000 points at present. Over 4000 of these points were lost between October and November. With the stock market drying up as a source for funds, banks and financial institutions have not helped. They are holding back fearing defaults from companies facing the crunch of a slow down. Even CRR cuts of 3.5% between September and November, yielding as much as $30 billion has not changed the attitude of banks to potential borrowers. Speculation abounds that banks fear huge defaults into the future. What may be playing on their minds is that Indian corporations have at least $45 billion to return to overseas lenders in the next 11 months.

All of these factors have led to corporations and individuals taking a second look at how they do business and how they can manage what they have.

Tata Motors announced the closure of three of its plants for an unspecified period. Honda Siel (Honda Motor’s Indian joint-venture company) has deferred its expansion plan and the setting up of a new plant for the production of the Jazz car. The Jazz may now be manufactured at its old plant where the City and Civic are produced, indicating that the company may cut production of the other models. Maruti Suzuki, the largest car maker has cut production by 5% and plans to monitor consumption trends more closely, indicating the possibility of more cuts. The launch of German automaker Volkswagen’s light commercial vehicles, the Craftar and the Caravalle, has been deferred to June 2009.

Prominent realtors such as KP Singh—the promoter of India’s largest real-estate company DLF—has said that the company had no option but to go slow on certain projects, drop some and cut jobs. Reports indicate that 10,000 people have already lost jobs at DLF. Unitech, a competitor of DLF, is in troubled waters and has had to put its own office on sale so as to meet with certain fund requirements to close out pending projects.

A recent study by investment bank Credit Suisse said a clutch of 34 projects with an investment of about $190 billion faced a 19-month delay on an average resulting in a 30% cost overrun.

Sectors such as diamond and jewelry, 50,000 are said to have lost their jobs. The textile sector, one of the largest industries in India, 700,000 workers were fired in the last three months. The commerce secretary, G.K. Pillai, added to the fears of more job losses in this sector. He felt that if the economic downturn in the U.S. continues for another quarter, as many as 200,000 jobs could be wiped out here in India.

Airlines are flying their planes half empty and hotels are giving away rooms at huge discounts. While the numbers are not known, job and salary cuts have become commonplace in this sector. Jet Airways recently announced 10% to 25% cut in salaries across-the-board. Terrorism will only add to the pain of this sector.

One of the three chambers of commerce, Associated Chamber of Commerce and Industry in India, claims that by January 2009 almost a third of the existing jobs currently in the organized sector, could go away if the economic scenario does not change.  

This is an alarming projection and can be contested. However, industry observers do believe that the number of unemployed and job losses are bound to grow particularly if the retail sector continues with the slump it is witnessing. Reliance Retail and the Birla Group are not going through fully with their expansion plans in this sector. The former cut 400 jobs two weeks ago and reports indicate that the Birla Group may consider similar cuts. Several other large retailers have reportedly recorded as much as a 40% drop in footfalls during the recent Diwali festival—a period associated with prosperity and material goods as Indians pray to the Goddess of wealth, Lakshmi. High-end brands such as CK, French Connection, Tommy have all gone on sale for long periods with discounts ranging from 40% to 60%—sales that the Indian market has not witnessed in several years.

This is indicative of the fact that Indians are not consuming the same way they did some months ago. A recent survey by a leading industry chamber reported that more than 50% of the working Indian class fear losing their jobs in 2009. With banks holding back on lending and the cost of living hurting the pocket of most of the salaried class, the consumer is holding back on what they want and sticking with what they need.

On the industry front, the business confidence index, a half-yearly measure of business sentiments among various sectors tracked by CII (Confederation of Indian Industry), has sharply declined by 4.7 points during the first half of the current fiscal. This is a 10-point drop compared to a year ago.

While economists and industry bodies huddled in closed-door meetings believe that India will grow and a recovery is a possibility, they hesitate from putting a time frame to the current mood and economics. The sentiment, they believe, is a result of not just the slump in the stock markets, job losses and salary cuts but is also due to body blows that India has faced due to terrorism. The bomb blasts in Delhi close to Diwali is amongst the reasons why fewer people ventured out to crowded markets. The continuing terror situation in Mumbai is now making the urban Indian feel more vulnerable than before. And that foreign investors and tourists may reconsider plans for India, the emphasis on the negative could continue.

Messrs. Sharma and Rangnekar are Dehli-based journalists at Indiabiz News & Research Services.