Not yet dawn
The economy is firmly on the rebound, global economies are in the process of bidding adieu to a recession, the fiscal deficit, reckons the Finance Minister, will be tamed over three years, and investors gave last fortnight's Budget a wholehearted thumbs up (at least till the time of writing). Then, why are the governor of India's central bank, the Commerce Minister and the country's Chief Statistician still wary about popping the champagne?
One reason could be that, despite the recent record-shattering 16.8 per cent year-on-year growth for December in the Index of Industrial Production (IIP), a clutch of sectors that have a weightage of some 40 per cent in the IIP hasn't felt the benefits of the government's economic incentives and, therefore, is yet to join the party. "The worst is possibly over," explains Abheek Barua, Chief Economist at HDFC Bank, "but a broadbased recovery in the economy would take a while." What's more, even if many of these sectors didn't benefit from the stimulus, they are going to feel the heat of a partial rollback of incentives in terms of higher excise duties proposed by Pranab Mukherjee in Budget 2010-11.
Harsh Mariwala "Inflation has restricted household budgets, and droughts and floods have also contributed to a slower recovery"
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Here's how what could be the fag end of what was a brutal recession globally is still casting a pall over some businesses. Cut to the US, where JC Penney, a chain of mid-range department stores, has revamped its range to attract recession-hit consumers. Just one example: In the past one year, JC Penney, most of whose stores are in suburban areas, has replaced its more pricey range of leather shoes with synthetic shoes. And they're doing brisk business. No prizes for guessing who gets hurt: Makers of leather products from countries like India, who have relied heavily in the past on exports to developed markets.
The changed buying behaviour in the world's biggest economy, which has a colossal appetite for a mélange of imports that range from steel to food, has sent shockwaves in many of the economies that are dependent on them. India is no exception. But then it's not only the US that's putting a spanner in the works of some of India's industrial sectors. On the Persian Gulf coast of the United Arab Emirates (UAE), the debt crisis in yesterday's El Dorado, Dubai, has come as a sucker punch for engineering goods, which was already reeling from the impact of the US slowdown. The UAE is amongst the top three exporting destinations for Indian engineering goods makers (the other two are the US and Singapore).
"The Dubai debt crisis has compounded our problems as there was a big market for engineering goods from the Dubai construction industry," says Nayan N. Shah, Regional Chairman (Western Region), Engineering Export Promotion Council (EEPC) India.
Naresh Bhasin "The leather industry is predominantly export-oriented and there is no cushion available from the domestic market"
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That's one half of the story. A handful of sectors that are dependent on domestic consumption, too, are still miles away from a recovery. The paper industry, for instance, is facing an overhang of overcapacity. The foods industry is doubtless the victim of prices going out of control. At the same time, the packaged foods sector has become a victim of consumer diffidence during a downturn, and that trend will take a while to reverse. Says Harsh Mariwala, Chairman & Managing Director, Marico Ltd: "The inflationary pressure has restricted household budgets, and droughts and floods have also contributed to a slower recovery in foods and beverages."
Cigarettes and beverages (read liquor, beer and wine) makers continue to face a government and legislative backlash, in terms of higher duties (for cigarettes) and curbs on consumption (of beverages). Says Sunil Alagh, former CEO of Britannia Industries, who now runs his own consultancy, SKA Advisors: "Companies in foods and beverages will end up showing lesser profits. That's because commodity prices are on the rise and there is less money in the hands of the people."
Indeed, one of the keys to a reversal in fortunes for these businesses is increased domestic consumption. Take wine, for instance, where 95 per cent of production is consumed domestically and which registered a de-growth of 20 per cent in 2009. "The consumption of beverages is linked to the general well-being of an economy. If we can maintain a 7 per cent-plus growth over the next decade, this industry is really in a sweet spot," believes Rajeev Samant, CEO, Sula Wines. Yet, for companies in packaged and processed foods and beverages, the IIP, which shows a 7.4 per cent de-growth for foods, may not be an adequate reflection of their prospects.
The IIP would, after all, consider close to a dozen food items that include milk, biscuits, tea, chocolate, sugar confectionery and edible oil. As Adi Godrej, Chairman, Godrej Group, which has several food-related activities like confectionery, tea, fruit drinks & juices, puts it: "I think the food and beverages sector is doing reasonably well. We shouldn't look at the IIP numbers alone. It's an old index."
Rajeev Samant "The consumption of beverages is actually linked to the general well-being of an economy"
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The badly-hit modern retail sector also contributed to lower demand for packaged and processed foods. As did the decline in the hotel and tourism sector in 2009.
It doesn't help when industries are mired in their own problems and no amount of stimulus would be able to provide significant relief. Take, for instance, the poor performance of the jute industry, which is a result of a long-drawn bitter battle over wage settlements between workers and mill owners. This has led to a virtual shutdown of operations of jute mills in West Bengal, which contribute over 90 per cent of the total jute bags and yarns production in the country. "This has contributed to the falling productivity in our sector," reasons S.K. Bhattacharya, Executive Vice Chairman, Indian Jute Mills Association. A flood of cheaper imports from Bangladesh only added to the woes.
Similarly, the paper industry has to blame itself for the mess it created by overstretching itself during boom time to meet the growing demand. Industry leader Ballarpur Industries and others like JK Paper announced capacity additions during the boom times, many of which will come on stream now. Although demand is growing in terms of volumes, it is not reflected in top-line growth because of a sharp correction in paper prices in the wake of the US subprime crisis.
"There has been a reduction of 8-10 per cent in paper prices with newsprint prices registering a much sharper fall; and this is contributing to falling turnovers," explains Pragya Bansal, Associate Director at Fitch Ratings Ltd. The newsprint segment, where almost half of the domestic requirement is met from imports, is the worst affected as domestic prices are closely aligned to international prices.
"The demand in the newsprint segment has been sluggish as a structural shift is happening in global markets owing to the consumption of newsprint actually diminishing with the advent of the digital format," says Rajeev Ranjan Vederah, Managing Director of the Avantha Group's Ballarpur Industries Ltd (BILT).
Rajeev Ranjan Vederah "What may impact the industry over the short term is the oversupply in both domestic and global markets"
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As against paper, food, beverages, et al—whose fortunes are linked to domestic consumption— there is an abundance of sectors that are heavily reliant on exports, and whose overseas markets are in the doldrums. These include leather, engineering goods, carpets, and handicrafts, to name just four. "Exports to Asia are improving, but unless the global economies pick up momentum or external demand improves, it will be difficult to sustain a broad-based recovery," believes Barua of HDFC Bank Ltd.
In leather, a host of smaller units are on the brink of closing down. "We are surrounded by all the variables like double-digit interest rates and fluctuating currencies," says Naresh Bhasin, Regional Chairman (West), Council for Leather Exports. He adds that the net disposable income of an individual abroad has gone down by 30-40 per cent. "These (stimulus package) are small gestures on the part of the government, but they need to be in place until the consumption improves in the western world," adds Bhasin. In fact, the Union Budget 2010-11 has rolled back the excise duty from 8 per cent to 10 per cent. Perhaps one longerterm solution is to refocus on the domestic market, just as the Chinese have begun to do.
Clearly, during such tough times, it's the smaller enterprises that get hit the hardest—like those that make engineering goods, who are caught in the pincer grip of rising raw material prices, higher interest rates and currency fluctuations. "The current level of excise duty reduction under the stimulus package is giving us a little bit of impetus to fight against the imports that have been liberalised. But if that excise duty goes up and import duties remain the same, the variation will impact the local engineering industry hard," Shah of EEPC India told BT before the Finance Minister embarked on his Budget speech. Clearly, the rollback of excise duties to 10 per cent isn't what the doctor ordered for the engineering goods industry.
On the oil front, the production decline early this year was only to be expected with ONGC's oil fields ageing and production falling. That drop, unsurprisingly, also reflected in refinery output of petroleum products dipping by only 1 per cent during the period. Refinery output declined in the first three quarters of 2009-10 for two reasons: One, crude output itself was lower; and, two, the export market for petroleum products was subdued, explains Sudhir K. Nair, Head, CRISIL Research, Mumbai. "The refineries chose to cut back on production in response to tepid market conditions. I expect the refinery output this year to be either flat or slightly lower than last year and to pick up substantially next year," he adds.
To be sure, if the Indian economy has to get on to the path of 9 per centplus growth, virtually every industrial sector has to play its part. And then, let's not forget the role agriculture, which is also lagging behind (see More Weeds Than Green Shoots), has to play. "All the sectors are interlinked and will have a multiplier effect in the economy," points out Barua of HDFC Bank. The recovery, so far, isn't a mirage, but then, until it is broader-based, it won't quite be dawn—not yet.
— Additional reporting by K.R. Balasubramanyam
