Indian economy in 2012 to remain painful, home finances to be hit most
If 2011 was full of signs of an economy decelerating - high inflation, a slowdown in manufacturing and rising inventory of unsold apartments - this year will hit Indians where it hurts the most: home finances.
Wednesday, December 21, was one of those increasingly rare days at the centre of economic policymaking in New Delhi. In the sandstone-built North Block headquarters of the country's finance ministry, bureaucrats were in a fist-pumping mood as they talked about credit rating agency Moody's upgrade of India's rating. Sovereign bonds had been upgraded that morning from speculative-grade to investment-worthy as Moody's backed India's long-term potential.
The mood turned sombre once the conversation among the wonks moved to short-term aspects of the economy and the outlook for 2012. The conclusion: the year is expected to be painful as the cumulative impact of macroeconomic weaknesses finally worms its way into the lives of almost every Indian. If 2011 was full of signs of an economy decelerating - high inflation , a slowdown in manufacturing , exports losing momentum, waning holiday sales, and rising inventory of unsold apartments - this year will hit Indians, especially middleclass Indians, where it hurts the most: home finances.
The finances of most Indian homes have already been hurting with inflation, or the rate at which prices rise, running for 12 months on the trot at more than double the 4.5 per cent that the Reserve Bank of India, or RBI, considers manageable. But what is going to be different this year is that incomes will likely remain flat from the previous year or rise marginally, even as the effects of such long-term inflation play havoc with rents, interest on loans, spending on health care, education and entertainment, and also expenses such as drivers and house help.
Education expenses, first. Turn to Bangalore's Inventure Academy, a school catering to a predominantly upper middle-class clientele, for what is around the corner. The school, which charges its 700 students between Rs 85,000 and Rs 2 lakh annually, has had to increase fees almost every year since it opened in 2005, but never by more than 10 per cent. In the coming academic year, starting June 2012, the increase will be 15 per cent, says Nooraine Fazal, the school's Managing Trustee, CEO and Co-founder. She puts this down to rising fuel and food prices, increased spending on staff, and higher cost of capital. Interest rates, she says, are up from about eight per cent in 2005 to more than 14 per cent now.
Private colleges and universities are likely worse affected. Most such institutions Business Today spoke to said they would decide on fee revisions only next year, but the rise in costs at Hyderabad-based Indian School of Business, or ISB, is illustrative. A day after Christmas, its Dean, Ajit Rangnekar, was busy in meetings to find ways to reduce costs. The B-school's tab for visiting foreign faculty, which takes roughly half the teaching load at ISB, has gone up by 20 per cent, reflecting how much the rupee has depreciated against the US dollar in recent months. This translates to a three to four per cent increase in ISB's total costs.
Add inflation and that could rise to 10 per cent. "We are looking at several other ways to get lean and fit," says Rangnekar, adding that options like outsourcing jobs, better applicant outreach, and deploying technology more effectively are being considered. ISB cannot increase student fees, running at an all-inclusive Rs 21.5 lakh, for its 2012/13 programme because they were announced and frozen in April 2011. Other colleges will not have such compulsions in the new academic year.
Next, if you are healthy, try and stay so. Costs of hospital care and medication are on an upward spiral. Shankar Raj, a freelance writer in Bangalore, is feeling the pinch of paying for his 82-year-old mother's care. Prasanna, who has been bedridden for the last three years with Parkinson's disease, needs hospitalisation at least once a year. In 2011, such an admission set Raj back by Rs 1 lakh, up 20 per cent from what he paid a year earlier. Monthly expenses on medicines and a home nurse have risen to Rs 12,000 from Rs 10,000 a year ago.
The other major expense in many middle-class homes is EMIs, short for equated monthly instalments or monthly repayments of loans taken for apartments, cars, holidays or even televisions, home theatre systems and the like. For, say, a Rs 33 lakh housing loan of 20 years' tenor, the EMI has risen to about Rs 38,500, even after an increase in the tenor, from some Rs 32,800 a year ago. That is Rs 5,700 less in disposable income, savings, spending, or a mix of all the above. Examples of people dealing with this burden are peppered about in this story.
Jobs, Salaries Hit
The effects of all such increases in costs would have been mitigated if salary increases were in line with the past. But human resources, or HR, experts say companies are looking at muted compensation increases in the review season ahead. "This time, we think the average salary hike will be eight to 10 per cent, down from 12 to 15 per cent last year," says Shelly Singh, Co-founder and Executive Vice President of PeopleStrong, an HR consulting firm.
Indeed, K. Ramkumar, who runs HR at ICICI Bank, says: "Tough economic conditions will force organisations to be prudent with salary rises." Power developer Lanco expects not to give out more than 10 per cent raises to even its best performers, according to N. Sudhakara Moorthy, Executive Director, Corporate HR, Lanco. Such predictions for this year may sound better than in 2009, the year of an economic slowdown in India, when raises were zero to five per cent, but here lies the rub: the average inflation in that period was 3.85 per cent versus more than nine per cent in the last 12 months. In other words, real income raises in 2012 may actually be less than in 2009.
Singh also points out that since 2009 - the worst year in recent Indian corporate history - companies have shifted to variable salary structures, where as much as 25 to 30 per cent of the salary is linked directly to company, team and individual performance. With average company net profitability contracting by 18 per cent in the July to September quarter from the preceding three months for BT500 companies, and a bleak outlook for the following quarters, such links will only shrink the takeouts under variable salary heads, she predicts.
A squeeze on salaries, when found inadequate, is typically followed by pink slips. Large-scale retrenchments have not hit the headlines yet, but employees in sectors such as banking and financial services, telecom, and retail are feeling the crunch, which can be traumatic. After working with Tata Teleservices for six years, Sanjay Tiwari was one among the 2,000 employees the company retrenched in 2011. "While Tata has been as fair as possible, the news still hurts," he says, calling himself lucky to have found a job with Samsung India.
Not only are companies cautious about hiring, they are less tolerant of flab and low productivity, says headhunter Chaitali Mukherjee. "The most vulnerable in such instances are people in the senior and middle management levels," says Mukherjee, who runs Right Management, the talent and career management division of Manpower Group in India. A superfluous senior role is particularly at risk given the cost savings such a move offers.
Some of this is already being reported across India. Computing firm Dell, for instance, has in recent months seen the exit of at least 50 mid-level executives - from senior managers to vice presidents - from its services division, according to three people with close knowledge of the situation. The response of a Dell spokesperson was cryptic: "There has been no restructuring beyond the regular personnel turnover as per usual HR processes."
As part of this trend, people in leadership roles across companies are coming under the scanner. Shareholders and board members are grilling CEOs and other leaders in companies what they will deliver over and above what is expected from the business as part of natural growth, says R.Suresh, Managing Director, Stanton Chase International, a recruitment firm. Additionally, companies are "delayering" at the top. B. S. Murthy, CEO of executive search firm Leadership Capital, says business for his firm from software clients is down 30 per cent this quarter compared to the previous two quarters. "There is no official freeze. However, the top 20 software companies are hardly opening up positions at senior levels," he says.
Hirers and senior professionals who have been through interviews at IBM India say there is a freeze at the company for any position that is not billable to customers. An IBM spokesperson did not confirm this, saying the company "will continue to hire and rebalance skills and capabilities to meet the changing needs of clients and our business".
At Accenture, travel budgets are being watched closely. Executives who flew business class are now being asked to travel economy and hotel budgets are being halved. Accenture said it would not comment on the changes.
The only source of optimism in the sector is at the junior level, where hiring outlook stays strong with recruitment plans at companies such as Tata Consultancy Services, Infosys, Wipro and Cognizant remaining unchanged. But senior company executives say off the record that the aggressive hiring stance could change if any bad news comes from Europe.
When Will the Tide Turn?
The economy is a series of interlocking factors such as inflation, government spending, interest rates, exchange rates, investment, and growth. A problem with any one of these variables poses risks. Whether there would be a surge in inflation was the first question asked of policymakers after the 2008 global financial crisis. That turned into a slow slide into today's difficulties and dim prospects for 2012. "Inflation remains a key concern and is primarily the result of a late start to the monetary tightening cycle, the absence of fiscal policy tightening, and the lack of structural reforms to improve the supply side of the economy," says Leif Lybecker Eskesen, Chief Economist for India & ASEAN, HSBC Global Research, from Singapore.
Fiscal deficit, the difference between the government's income and expenditure that is bridged by borrowings, has been difficult to rein in this year as growth in government revenue trails the falling pace of economic growth. Finance Minister Pranab Mukherjee has conceded that fiscal deficit will be difficult to contain at 4.6 per cent of gross domestic product, the level promised in the last Union Budget, and the government said in September that it plans to borrow some Rs 53,000 crore more than the Rs 4.17 trillion (one trillion equals 100,000 crore) it had earlier budgeted.
"In this scenario, fiscal deficit is the biggest risk," says Raj Majumder, Founder and CEO, Auroch Investment Managers. Deficits can be inflationary and crowd out private capital seekers, and the worry of analysts is that just as India is coming out of an inflationary phase, it may just get pulled right back into it.
Predicting where an economy is headed at the most certain of times can be like throwing darts in a fogged up room. And, in these uncertain times, few are willing to predict how India will turn out in 2012. The consensus among the nearly dozen economists and policy mandarins Business Today interviewed is that the best India can expect is for inflation to drop to low single digits in the weeks and months ahead. This, in turn, could nudge the central bank, which sets capital costs in the economy, off its hawkish perch on interest rates. And this, the hypothesis goes, will encourage higher consumer spending and, more importantly for the economy, investments in productive assets, which have stayed almost flat this fiscal year with business sentiment at an all-time low.
At this point, all this is in the realm of speculation - notwithstanding Mukesh Ambani's assurance that he will invest Rs 70,000 crore in the next two years in India - but the thesis is there for all to read: 2012 is going to be a nasty year at your workplace. And in your home.
BT RETRO
A summary of how BT tracked the unravelling Indian economy in 2011
As January 2011 ended, there were hints of a question mark over India's growth: rising infl ation, slowing industrial growth, capital investment drying up, and a weakening business sentiment. Analysis, backed by extensive reportage, by BT writers showed what was looming ahead, which was captured in our India Slowing cover. www.businesstoday.in/brakes2012
The editor's column in the issue was a little too prescient for comfort: www.businesstoday.in/poll-toll
Good journalism often means warning readers of what is around the corner. BT wrote about how exports, the one good spot in the Indian economy, were losing steam. www.businesstoday.in/export-woes
And, as much as delivering bad news is an unenviable day job, we wrote why readers should not have high hopes for 2012, and rein in expectations until the 2014 general elections. Five Elections and a Funeral made for a stark headline and starker story.www.businesstoday.in/hindu-rate
Additional reporting by Goutam Das, E. Kumar Sharma, Manu Kaushik, Rajiv Bhuva, K.R. Balasubramanyam and Anumeha Chaturvedi
The mood turned sombre once the conversation among the wonks moved to short-term aspects of the economy and the outlook for 2012. The conclusion: the year is expected to be painful as the cumulative impact of macroeconomic weaknesses finally worms its way into the lives of almost every Indian. If 2011 was full of signs of an economy decelerating - high inflation , a slowdown in manufacturing , exports losing momentum, waning holiday sales, and rising inventory of unsold apartments - this year will hit Indians, especially middleclass Indians, where it hurts the most: home finances.
The finances of most Indian homes have already been hurting with inflation, or the rate at which prices rise, running for 12 months on the trot at more than double the 4.5 per cent that the Reserve Bank of India, or RBI, considers manageable. But what is going to be different this year is that incomes will likely remain flat from the previous year or rise marginally, even as the effects of such long-term inflation play havoc with rents, interest on loans, spending on health care, education and entertainment, and also expenses such as drivers and house help.
Education expenses, first. Turn to Bangalore's Inventure Academy, a school catering to a predominantly upper middle-class clientele, for what is around the corner. The school, which charges its 700 students between Rs 85,000 and Rs 2 lakh annually, has had to increase fees almost every year since it opened in 2005, but never by more than 10 per cent. In the coming academic year, starting June 2012, the increase will be 15 per cent, says Nooraine Fazal, the school's Managing Trustee, CEO and Co-founder. She puts this down to rising fuel and food prices, increased spending on staff, and higher cost of capital. Interest rates, she says, are up from about eight per cent in 2005 to more than 14 per cent now.
Private colleges and universities are likely worse affected. Most such institutions Business Today spoke to said they would decide on fee revisions only next year, but the rise in costs at Hyderabad-based Indian School of Business, or ISB, is illustrative. A day after Christmas, its Dean, Ajit Rangnekar, was busy in meetings to find ways to reduce costs. The B-school's tab for visiting foreign faculty, which takes roughly half the teaching load at ISB, has gone up by 20 per cent, reflecting how much the rupee has depreciated against the US dollar in recent months. This translates to a three to four per cent increase in ISB's total costs.
Add inflation and that could rise to 10 per cent. "We are looking at several other ways to get lean and fit," says Rangnekar, adding that options like outsourcing jobs, better applicant outreach, and deploying technology more effectively are being considered. ISB cannot increase student fees, running at an all-inclusive Rs 21.5 lakh, for its 2012/13 programme because they were announced and frozen in April 2011. Other colleges will not have such compulsions in the new academic year.
Next, if you are healthy, try and stay so. Costs of hospital care and medication are on an upward spiral. Shankar Raj, a freelance writer in Bangalore, is feeling the pinch of paying for his 82-year-old mother's care. Prasanna, who has been bedridden for the last three years with Parkinson's disease, needs hospitalisation at least once a year. In 2011, such an admission set Raj back by Rs 1 lakh, up 20 per cent from what he paid a year earlier. Monthly expenses on medicines and a home nurse have risen to Rs 12,000 from Rs 10,000 a year ago.
The other major expense in many middle-class homes is EMIs, short for equated monthly instalments or monthly repayments of loans taken for apartments, cars, holidays or even televisions, home theatre systems and the like. For, say, a Rs 33 lakh housing loan of 20 years' tenor, the EMI has risen to about Rs 38,500, even after an increase in the tenor, from some Rs 32,800 a year ago. That is Rs 5,700 less in disposable income, savings, spending, or a mix of all the above. Examples of people dealing with this burden are peppered about in this story.
Jobs, Salaries Hit
The effects of all such increases in costs would have been mitigated if salary increases were in line with the past. But human resources, or HR, experts say companies are looking at muted compensation increases in the review season ahead. "This time, we think the average salary hike will be eight to 10 per cent, down from 12 to 15 per cent last year," says Shelly Singh, Co-founder and Executive Vice President of PeopleStrong, an HR consulting firm.
Indeed, K. Ramkumar, who runs HR at ICICI Bank, says: "Tough economic conditions will force organisations to be prudent with salary rises." Power developer Lanco expects not to give out more than 10 per cent raises to even its best performers, according to N. Sudhakara Moorthy, Executive Director, Corporate HR, Lanco. Such predictions for this year may sound better than in 2009, the year of an economic slowdown in India, when raises were zero to five per cent, but here lies the rub: the average inflation in that period was 3.85 per cent versus more than nine per cent in the last 12 months. In other words, real income raises in 2012 may actually be less than in 2009.
Singh also points out that since 2009 - the worst year in recent Indian corporate history - companies have shifted to variable salary structures, where as much as 25 to 30 per cent of the salary is linked directly to company, team and individual performance. With average company net profitability contracting by 18 per cent in the July to September quarter from the preceding three months for BT500 companies, and a bleak outlook for the following quarters, such links will only shrink the takeouts under variable salary heads, she predicts.
A squeeze on salaries, when found inadequate, is typically followed by pink slips. Large-scale retrenchments have not hit the headlines yet, but employees in sectors such as banking and financial services, telecom, and retail are feeling the crunch, which can be traumatic. After working with Tata Teleservices for six years, Sanjay Tiwari was one among the 2,000 employees the company retrenched in 2011. "While Tata has been as fair as possible, the news still hurts," he says, calling himself lucky to have found a job with Samsung India.
Not only are companies cautious about hiring, they are less tolerant of flab and low productivity, says headhunter Chaitali Mukherjee. "The most vulnerable in such instances are people in the senior and middle management levels," says Mukherjee, who runs Right Management, the talent and career management division of Manpower Group in India. A superfluous senior role is particularly at risk given the cost savings such a move offers.
Some of this is already being reported across India. Computing firm Dell, for instance, has in recent months seen the exit of at least 50 mid-level executives - from senior managers to vice presidents - from its services division, according to three people with close knowledge of the situation. The response of a Dell spokesperson was cryptic: "There has been no restructuring beyond the regular personnel turnover as per usual HR processes."
As part of this trend, people in leadership roles across companies are coming under the scanner. Shareholders and board members are grilling CEOs and other leaders in companies what they will deliver over and above what is expected from the business as part of natural growth, says R.Suresh, Managing Director, Stanton Chase International, a recruitment firm. Additionally, companies are "delayering" at the top. B. S. Murthy, CEO of executive search firm Leadership Capital, says business for his firm from software clients is down 30 per cent this quarter compared to the previous two quarters. "There is no official freeze. However, the top 20 software companies are hardly opening up positions at senior levels," he says.
Hirers and senior professionals who have been through interviews at IBM India say there is a freeze at the company for any position that is not billable to customers. An IBM spokesperson did not confirm this, saying the company "will continue to hire and rebalance skills and capabilities to meet the changing needs of clients and our business".
At Accenture, travel budgets are being watched closely. Executives who flew business class are now being asked to travel economy and hotel budgets are being halved. Accenture said it would not comment on the changes.
The only source of optimism in the sector is at the junior level, where hiring outlook stays strong with recruitment plans at companies such as Tata Consultancy Services, Infosys, Wipro and Cognizant remaining unchanged. But senior company executives say off the record that the aggressive hiring stance could change if any bad news comes from Europe.
When Will the Tide Turn?
The economy is a series of interlocking factors such as inflation, government spending, interest rates, exchange rates, investment, and growth. A problem with any one of these variables poses risks. Whether there would be a surge in inflation was the first question asked of policymakers after the 2008 global financial crisis. That turned into a slow slide into today's difficulties and dim prospects for 2012. "Inflation remains a key concern and is primarily the result of a late start to the monetary tightening cycle, the absence of fiscal policy tightening, and the lack of structural reforms to improve the supply side of the economy," says Leif Lybecker Eskesen, Chief Economist for India & ASEAN, HSBC Global Research, from Singapore.
Fiscal deficit, the difference between the government's income and expenditure that is bridged by borrowings, has been difficult to rein in this year as growth in government revenue trails the falling pace of economic growth. Finance Minister Pranab Mukherjee has conceded that fiscal deficit will be difficult to contain at 4.6 per cent of gross domestic product, the level promised in the last Union Budget, and the government said in September that it plans to borrow some Rs 53,000 crore more than the Rs 4.17 trillion (one trillion equals 100,000 crore) it had earlier budgeted.
Predicting where an economy is headed at the most certain of times can be like throwing darts in a fogged up room. And, in these uncertain times, few are willing to predict how India will turn out in 2012. The consensus among the nearly dozen economists and policy mandarins Business Today interviewed is that the best India can expect is for inflation to drop to low single digits in the weeks and months ahead. This, in turn, could nudge the central bank, which sets capital costs in the economy, off its hawkish perch on interest rates. And this, the hypothesis goes, will encourage higher consumer spending and, more importantly for the economy, investments in productive assets, which have stayed almost flat this fiscal year with business sentiment at an all-time low.
At this point, all this is in the realm of speculation - notwithstanding Mukesh Ambani's assurance that he will invest Rs 70,000 crore in the next two years in India - but the thesis is there for all to read: 2012 is going to be a nasty year at your workplace. And in your home.
A summary of how BT tracked the unravelling Indian economy in 2011
As January 2011 ended, there were hints of a question mark over India's growth: rising infl ation, slowing industrial growth, capital investment drying up, and a weakening business sentiment. Analysis, backed by extensive reportage, by BT writers showed what was looming ahead, which was captured in our India Slowing cover. www.businesstoday.in/brakes2012
The editor's column in the issue was a little too prescient for comfort: www.businesstoday.in/poll-toll
Good journalism often means warning readers of what is around the corner. BT wrote about how exports, the one good spot in the Indian economy, were losing steam. www.businesstoday.in/export-woes
And, as much as delivering bad news is an unenviable day job, we wrote why readers should not have high hopes for 2012, and rein in expectations until the 2014 general elections. Five Elections and a Funeral made for a stark headline and starker story.www.businesstoday.in/hindu-rate
Additional reporting by Goutam Das, E. Kumar Sharma, Manu Kaushik, Rajiv Bhuva, K.R. Balasubramanyam and Anumeha Chaturvedi
