Corporate bosses across sectors told ET in strict anonymity that they were disappointed by the lack of stimulus measures in the July 5 budget. Some also characterised the higher surcharge on the super-rich as inimical to corporates. FM Nirmala Sitharaman has said the government believed the richest should contribute more to society and nation building.
Some veterans are optimistic that a turnaround isn’t too far away.
“My view is that we will emerge out of this downturn within a year,” said L&T chairman AM Naik. L&T said Tuesday that June quarter profit rose 20% and contracts advanced 12%.
The IMF lowered its FY20 growth forecast for India to 7% from 7.3%, but said it will expand at 7.2% in FY21. The lower estimate for this fiscal year “reflects a weaker-than-expected outlook for domestic demand”, it said in the latest World Economic Outlook that was released on Tuesday.
Growth slowed to a five-year low of 5.8% in the March quarter, according to the latest government data. For the year, it was down to 6.8% from 7.2% in FY18.
This could be an opportunity to tighten the belt.
“A slowdown is a terrible thing to waste,” said Mahindra & Mahindra managing director Pawan Goenka, paraphrasing economist Paul Romer.
Companies will seek to optimise costs and manage slow market conditions, said some CEOs. As long as it doesn’t last too long, a slowdown every five-six years forces companies to shed flab that would have accumulated over the years and become lean again, they said.
The economic uncertainty isn’t confined to India, said TVS Motor Co chairman Venu Srinivasan. After nearly 10 years of consistent growth following the global financial crisis, activity has slowed across the world. Even China, with over three decades of strong growth, has been stuttering in the past year or so amid trade tensions with the US. That and other factors such as the North American trade renegotiation and Brexit have dampened global economic activity. India isn’t insulated from such global currents, Srinivasan said.
But the government has implemented some long-term reforms in the past few years such as the Insolvency and Bankruptcy Code and the Real Estate (Regulation and Development) Act along with a renewed focus on the micro, small and medium enterprises sector as well as encouraging startups.
“This combination of actions will see demand picking up in the coming months, leading to strong economic growth yet again in India,” Srinivasan said.
The auto industry has been one of the most high-profile casualties of the slowdown with the June quarter seeing the steepest volume contraction in a three-month period since FY2001.
“I would put the reason in three buckets,” said M&M’s Goenka. “Availability and cost of financing both for the customers as well as dealers — I think the initiatives announced in the budgets for public sector banks and non-banking financial companies should help to a large extent.”
SHORT-TERM STIMULUS IS NEEDED
He said the next factor was “increased transaction cost because of many factors that have come together. A short-term stimulus is required, whether it comes from the government or the industry players, or a combination”. The third factor was “overall sentiment, which has turned hugely negative. For this there is no immediate fix but some ‘feel good’ news or announcements will help to turn the sentiment positive”.
Marico chairman Harsh Mariwala said it’s not easy to identify the precise reason for dampened sentiments. “Is it a liquidity issue? Some sectors like automobile or real estate are in a bad shape but that’s not true for all sectors. So maybe the slowdown may not really worsen. But we need to watch out for trends to be sure,” he said.
As for retail, one corporate head said growth has been curtailed but modern retail is faring well. “We are seeing a major shift from unorganised to the organised segment,” he said.
CARE Ratings chief economist Madan Sabnavis cited the expectations of a budget stimulus being dashed. “The government has stuck to the fiscal road map and hence not deviated by spending more beyond the fiscal constraints.”
He said corporate India expects the Reserve Bank of India (RBI) to reduce rates further to help support a revival. Also expected are key labour and land reforms, given that the higher surcharge on the richest hasn’t gone down too well.
“The companies would like the RBI to lower rates further so that cost of borrowing comes down,” Sabnavis said. “There are also expectations that the government would push forward reforms in labour and land (during) this tenure. Within the budget, the tax on superrich has affected FPI flows which have pushed the market down. Therefore, India Inc has some concerns on the policy environment.”
CARE Research said in a report that cost cutting is the first order of day when there is pressure on the top line. If that doesn’t work, the work force could be resized in order to preserve margins. Although India is still the fastest-growing economy, this hasn’t been accompanied by job creation, rising consumption and investment.
“Even for FY20 the (Economic Survey) puts growth at 7% which is not very different from last year,” CARE Research said. “Clearly consumption is lagging and there is no discernible pickup in private investment. The limited investment is by the government and in some sectors of the private economy. Manufacturing in particular has been lacklustre which has affected future prospects. The sectors doing well are more in services such as ecommerce, construction, retail.”
Sabnavis said the rural demand story did not play out last year as farm incomes fell. The NBFC liquidity squeeze had a direct impact on credit to retail, infrastructure and small & medium enterprises. On the other hand, after being forced to recognise bad assets, banks have become more choosy about lending.
In the absence of job creation and income growth, demand took a hit, leading to inventories getting built up. This has in turn affected production plans this year, Sabnavis said. Some sectors, however, will continue to do well such as ecommerce and retail followed by industries that are linked to infrastructure where the government spends. Thus cement and steel may see some support. The backward linkages from these industries to the supply chains will tick but may not be fast enough to provide the big push to growth this year, said Sabnavis.