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COVER
STORY: ECONOMY
Has
the slowdown come too soon?
For
the industry yes, because it had emerged from a three-year slowdown barely
a year ago
It
was only in 1999 that most of Indian industry had recovered from a three-year
period of low and uneven growth which had employment, income and sales
crawling. The reappearance of a slowdown now threatens to cut short the
recovery even before its full bloom. Some nervousness in the economy became
evident right from April, the first month of the fiscal year 2000-2001.
The stock markets went in a tailspin with the average monthly value of
the Sensex down to 3711 points in October from 4658 in April. The sinking
sentiments reverberated in the foreign exchange market where the rupee
has fallen by over 7 per cent since April.
The firming
of interest rates has dampened the sentiments further. Another blow came
from what's now understood to be the worst of all normal monsoons in the
past 11 years. While that shrivelled rural purchasing power, the hike
in petroleum prices and 4-6 percentage point increase in sales taxes all
over the country impacted urban demand. Rues Venugopal Dhoot, chairman,
Videocon: "Manufacturers have been dealt with a double blow. Agriculture
faltered due to poor monsoons, and urban consumers were reeling under
the effect of higher oil prices and sliding stock markets." Adds
U. Shankar, director, Madras School of Economics: "Oil prices hike,
plummeting share values and delay in passage of some key legislative reforms
have strained the economic recovery."
In some
industries, the spectacular sales growth last year is the cause of the
current slowdown. Automobile is a clear case of an industry that fed on
its future growth last year. Driven by rumours of an imminent hike in
sales tax and lured by the explosion in car finance, lots of people advanced
their car purchase last year. Points out Rohtash Mal, general manager,
marketing, Maruti Udyog: "Our sales grew by 60 per cent last year.
A showdown from that level is only natural."
Then there
are sociological reasons like an unusually prolonged period that is considered
inauspicious for marriage among Hindus. Cribs Zutshi: "Northern India
(the largest market for consumer durable) hasn't had a single auspicious
wedding date between April and October.
That's one significant cause of the demand slumber."
Why
Isn't Anybody Investing?
Excess capacities and the threat of cheaper imports have stalled new investments
in manufacturing
If the slowdown
seems to have returned too soon, it is also because last year's recovery
was founded on two short-term factors: high agriculture growth of 1998-99,
which raised rural incomes in 1999-2000, and resurgence in exports which
continues for a second year. But as Subir Gokarn, IFCI economist at NCAER,
points out, "The revival in investments which could have led to a
long-term recovery did not happen."
Initially,
the absence of investments was due to the massive capacities built during
the mid-1990s. But surely consumer demand hasn't been stagnant through
the 1990s. Yet, if investments have slackened, it is because some of the
capacities created were for products and services Indian consumers don't
want any more. "Consumer preferences are fast changing. Capacities
created without anticipating such changes are wasted, not excess,"
says Gokarn.
A bigger
and newer hurdle on investments is the threat of cheap imports. CII estimates
that Chinese imports to India between April and June this year were 43
per cent higher than the last year's level. A FICCI study shows that vanaspati
oil imports from Nepal have shot up from 32 metric tonnes in 1997-98 to
1,25,000 metric tonnes in 2000-2001. Slowly but steadily imports are eating
into domestic demand.
Another
roadblock is the shrinking public investment. Points out Amit Mitra, secretary-general,
FICCI: "Government spending on infrastructure is down 27 per cent
since 1997." That has slowed the demand for cement, steel and machine
tools. Says V.K. Srinivasan, director, Indian Institute of Economics,
Hyderabad: "The deceleration is due to stagnant public investment
and the confusion over public-sector restructuring."
Will
it turn into Recession?
The profusion in services and the ever-expanding consuming class will
prevent that from happening
A recession
occurs when the national income of a country falls for two consecutive
quarters. Surely, there are no signs of that happening, even though some
specific industries (e.g. machine tools, commercial vehicles) may actually
be in recession. Besides, even though fresh manufacturing investment is
dismal, companies are investing in modernisation and marketing across
all segments of industry. Samsung, for instance, is investing $5 million
(Rs 23 crore) in an R&D centre at its Noida plant and another $1.2
million in upgrading its dealer network. Says Bharat Ram: "The non-machinery
investments are certainly happening." The best indicator of rising
marketing expenditure is spending on advertising. In 2000 companies will
spend about Rs 6,400 crore on advertising in different media. That's 24
per cent higher than the adspend in 1998. Then there are new service areas
like retailing, insurance, call centres and a host of activities around
information technology which are creating new jobs and incomes. The RPG
Group's retail chain Foodworld has doubled its staff strength to 1,600
in the past one year.
But the
services sector, however buoyant, can't perk up the whole economy. Even
as new jobs are being created in the services sector, manufacturing is
retrenching. Bajaj Auto has downsized from 21,000 to 17,000 in five years
through a VRS. Moreover, while services can create lots of white-collar
jobs, large scale blue-collar jobs can be best created in manufacturing
and infrastructure, both of which are currently starved of investment.
No wonder, the consumption demand in India is both skewed and shallow.
Says Anand Mahindra, managing director, Mahindra & Mahindra: "The
shallowness of the Indian
market makes the economy lurch into quick cyclical slowdowns."
What
can turn the tide?
Government must deliver on reforms and companies must rejig their products
and marketing strategies
There are
ways to increase employment, herald investment in manufacturing and replace
shallowness with sustained consumer spending. The long things-to-do list
for the Government includes stepping up investment on housing and roads,
quick clearance to some infrastructure projects and balancing its books
by controlling expenses and enhancing revenues. To be fair, Sinha does
promise to deliver on all these counts. Then there are a few specific
measures like the dereservation of products for the small-scale sector
(SSI), which experts bet, could allow flow of investment into manufacturing.
The Government recently removed readymade garments from the SSI list.
It now needs to cancel the list of 819 items altogether. A concurrent
step is to formulate flexible labour laws for new companies.
It is time
corporate India too rethinks its marketing strategies and product mix.
Remarks Preet K.S. Bedi, director, Lowe Lintas & Partner: "Often
the marketing and advertising for a product focuses on retaining customers
than getting new ones. That's not the right model for India where ownership
of most consumer products is so sparse." The implication? Companies
must change products, pricing and marketing to reach out to new customers.
If Sinha gets serious about his task, which he promises to, and companies
get closer to customers, which they have to, the economy will shed its
slumber for years to come.
-with
Amarnath K. Menon, Arun Ram, Stephen David
and Ramesh Vinayak
Pg.
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