• News
  • Columns
  • Interviews
  • BW Communities
  • Events
  • BW TV
  • Subscribe to Print
BW Businessworld

Dawning Optimism

Photo Credit :

Early this September, two banks — Axis Bank and HDFC Bank — announced that purchases using their credit cards from Levi's, a clothes retailer, could be paid off in three equated monthly installments, with no extra charge. From anecdotal evidence, it seems that the gambit is working. As the festive season is upon us, consumers appear to be returning to stores and spending with some abandon.

Dr Feelgood is also back in financial markets globally — and within our country. More economic data released in the past couple of weeks appeared to confirm that the ‘Great Recession' is taking its last breath. US Federal Reserve chairman Ben Bernanke said on 15 September that it was "technically over" in an address at the Brookings Institution, a leading think tank in Washington DC. But he also said that it was going to be "a very weak economy for some time" in the US.

Stockmarkets are certainly happy, seeing the new highs — the benchmark Bombay Stock Exchange's Sensitive Index (Sensex) crossed the 16000 mark recently, and is maintaining that level — they seem to be reaching almost every week. The success of large qualified institutional placements (QIPs) of equity along with equally large and successful debt capital issues provided the first booster shot of confidence. Subsequent initial public offerings (IPOs) and equity issuances, some by public sector enterprises such as Oil India, also contributed to the upward ride of the stockmarkets.

Source: Deutsche BankMost people seem to agree that consumer and business confidence are back. "There is a distinct change in sentiment," says Pankaj Razdan, deputy chief executive officer for financial services at Aditya Birla Management Corporation in Mumbai. "I think the fundamentals are now pointing in the same direction as the sentiment." He points to his group's chairman announcing a capital expenditure programme of Rs 16,000 crore for Hindalco over the next two years as evidence.

Business confidence may have got a further booster shot with Union Finance Minister Pranab Mukherjee's reassurance that the fiscal stimulus programmes would stay in place until it becomes clear that the incipient recovery in global economic conditions are visibly sustainable. Companies are back in the capital markets seeking to raise money to fund investment programmes through issuances of equity and debt. Some companies have even gone for overseas issuing foreign currency convertible bonds (FCCBs) or taking the external commercial borrowing (ECB) route.

But some questions still linger: concerns over rising food prices remain, and the threat of inflation is emerging, though not seriously enough. Will the dawning optimism stay and raise economic growth back to over 7 per cent as some experts are predicting? Will bank credit — which has grown sluggishly despite abundant liquidity and low interest rates — pick up and fuel economic activity further? And what impact will a weaker-than-expected global recovery do to the nascent recovery in India?

The Numbers Tell A Positive Story...
The index of industrial production (IIP) numbers for July — the numbers came out in early September — suggest that economic activity is gathering a little steam. The IIP grew by 6.8 per cent, but the pleasant surprise was in the upward revision of the numbers for June, from 7.8 per cent to 8.2 per cent. Most analysts were happy to see the uptick in manufacturing; but from a use-based perspective, capital goods production actually fell compared to June.

"But consumer goods have been consistently good as an indicator," says Deepali Bhargava, economist at ING Bank in Mumbai. "Services growth has been stable and sustained, even if it is a little slow." Production of consumer goods grew by nearly 20 per cent in July, the fourth month in a row when it has exceeded 12 per cent. Even in non-durable consumer goods, growth has risen to 5 per cent in July from 0.3 per cent in June; it was negative from February through May.

Sonal Varma, economist at Nomura Securities in Mumbai, says that domestic demand is driving the growth in IIP. "Capacity utilisation has also been positive," she says. "The easy availability of money has also helped the pick-up in demand; but external demand is yet to kick in."


  Paul Krugman
PAUL KRUGMAN, Nobel laureate; professor at Princeton University

"The end of the world appears to have been postponed. the world economy does not appear to be falling into an abyss but is still in trouble…a w-shaped recovery may become u-shaped."

Alan GreenspanALAN GREENSPAN, former chairman of US Federal Reserve

"The next six months seem reasonably easy to anticipate: no inflation, good economic growth… It looks good for the near term."

, chairman of US Federal Reserve

"Even though from a technical perspective the recession is very likely over at this point, it is still going to feel like a very weak economy for some time."

, Nobel laureate; professor at Columbia University

"The world economy is far from being out of the woods, even if it has pulled back from the precipice it teetered on after the collapse of Lehman."

, professor at New York University's Stern School of Business

"The basic scenario is going to be one of a U-shaped economic recovery where growth is going to remain below trend ... especially for the advanced economies."

Kenneth RogoffKENNETH ROGOFF, professor of Economics and Public Policy at Harvard University

"Essentially, there is still a risk that the financial crisis is simply hibernating as it slowly morphs into a government debt crisis."

Deutsche Bank in India analyses the economic momentum on a regular basis as the India Monthly Momentum Indicator (IMMI), which captures five variables — industrial production, bank credit, auto sales, exports and non-oil imports (see ‘The Turnaround?'). The IMMI suggests that the economy bottomed out in March; the recovery has been weak as credit growth and trade are in a zombie-like state. But the indicator suggests that the numbers for August could get even better, as both external and domestic demand show greater strength.

The story on the consumption side also seems reasonably robust. The revival of the monsoon — we have four consecutive weeks of good precipitation — has ameliorated fears of a drought somewhat. So estimates of rural personal consumption expenditure — they had been reduced at mid-August — have also been upgraded. The meteorological department says the cumulative deficit in rainfall has fallen to 20 per cent from 29 per cent, and could even fall to 15 per cent if the rain gods continue to smile.

...But The Global Economy Is The X Factor
This Wednesday, the meeting of the US Federal Open Markets Committee  (FOMC) — which sets monetary policy in the US, and whose pronouncements have a huge influence on economic activity — said that economic activity was "levelling out", meaning that the pace of decline was moderating. The FOMC believes that the residential housing market is improving, though analysts have pointed out that transaction volume growth at the lower end is not exactly a great improvement.

Click here to view enlarged imageRetail sales data in the US for August seemed to indicate that consumer spending was up, mostly driven by the federal government's ‘cash for clunkers' (auto-revitalisation) programme and increased sales volume at the petrol pumps. But the latter could well be a function of higher oil prices, rather than increased consumer demand. The FOMC simply says that household spending is "stabilising".

Industrial production in the US grew by 0.8 per cent in August, following a 1 per cent rise in July, breaking the falling trend prevalent since January 2008. Experts have pointed out that the increase in these two months is something that was observed in recoveries from previous recessions. The Aruoba-Dibold-Scotti Business Conditions Index — its underlying economic indicators include jobless claims, monthly payroll employment, industrial production, personal incomes, manufacturing and trade sales and quarterly gross domestic product (GDP) — is in positive territory for the first time since the recession began 20 months ago. There is a big cloud over this happy picture, however: unemployment, which is almost 10 per cent.

The Organisation for Economic Cooperation and Development in a recent report said that between January 2008 and July 2009, 15 million jobs were lost globally among the developed economies. By end of 2010, there could be another 10 million lost. That is a huge number and could be a serious drag on economic recovery in the developed world. The contagion into the emerging market economies — including India and China — can only be guessed at; but it is fairly certain that we cannot remain unaffected (see ‘Labour Pains' on page 32).

Faith And Credit
So what is the outlook for the Indian economy for the next quarter or two? Some analysts have revised their growth forecasts to over 7.5 per cent, while the more cautious ones are staying with their earlier estimates — of 6-6.5 per cent. "Most business model assumptions were based on a GDP growth rate of 9 per cent before the crisis," says Indranil Pan, chief economist of Kotak Mahindra Bank in Mumbai. "We have seen how that has cut things back once the crisis hit. We don't think that 8 or 9 per cent GDP growth is achievable for another two years."

The big question mark is on credit growth. Since the beginning of the financial year in April, incremental credit from the banking system has been about Rs 35,000 crore. Part of this can be explained because companies put many of their projects on the back burner as the global economic situation grew uncertain.

To add to the complications, while liquidity has been very easy, banks have exhibited a certain reluctance to lend, preferring to put their money in treasury bonds as the government has gone on a borrowing spree. To meet the target credit growth of 20 per cent in bank credit over last year, banks will have to lend hand over fist in the remaining six months. Disbursements will have to be in the region of over Rs 80,000 crore each month.

Bank credit growth is essential to push the other driver of economic growth: business investment. An assessment of capital expenditure trends shows that it has remained flat. But as confidence returns, investment may also begin to get a hold. Market murmurs indicate that loan sanctions have been going up, but it may be a while before disbursements actually pick up.

"At the peak of the last investment cycle capex, grew at 20 per cent in some quarters, and that has fallen to 5 per cent now," says Nomura's Varma. "We believe that investment demand will be slow to pick up for another year or so."

Others concur, saying that it will be another quarter before credit offtake picks up pace. "Yes, there may be some pick up in retail and consumer credit, but credit to industry and businesses will take longer," says a leading banker, who wished to remain anonymous. While the slowness could be attributed in part to procedural delays in disbursements, some point to the possibility of skittishness on the part of businesses about commodity price increases. Be that as it may, most agree that credit revival will be critical to sustain a GDP growth rate of even 6 per cent.

The Spectre Of Inflation
In the meanwhile, money supply growth remains strong, fuelled by the government's stimulus and associated borrowing programme. That worries some people; they see the emergence of inflationary pressures that could set off another set of problems for government and central bank policy, besides upsetting business calculations.

The Reserve Bank of India (RBI) flagged the possibility of inflationary pressures coming to the fore in its annual report. RBI Governor Duvvuri Subbarao, in a recent public appearance, even suggested that the central bank may have to cut back on its monetary accommodation policy sooner than it had envisaged. He was quick to reassure businesses that the current easy money conditions would stay until such time the recovery was well established.

"We have already seen the wholesale price index (WPI) move back into positive territory recently," says ING Bank's Bhargava. "With current money supply growth rates, the monsoon shortfall and rising food prices, the WPI could reach 5 per cent in December, rather than in March as originally envisaged." But the prospects for the Rabi crop are good, she adds, so things should settle down. But the consumer price index (CPI) could hit 10 per cent, because of food prices. But even that, many say, could be managed through the National Rural Employment Guarantee Scheme (NREGS) and other government transfers.

Inflation could also result from increased economic activity and commodity prices. But most repose faith in RBI's ability to manage inflation. The central bank has done well in managing inflation expectations, say several businessmen we spoke to. Like all other central banks around the globe, RBI has also kept the threat of inflation on its radar. It seems our central bank does not yet consider it as an immediate or imminently dangerous threat.

Looking On The Bright Side
But Indian business is confident that the domestic economy has turned the corner. "Our portfolio companies are seeing an uptick in demand," says Sandeep Singhal, managing director of Nexus India, a private equity firm. "Consumer growth has not slipped by much, even though business-to-business firms faced a significant reduction in the first half of the year."

The other number that buoys the contention that activity is picking up is tax revenues, both direct and indirect. Both have been higher for the current quarter than for the same quarter last year. "The growth may not be spectacular, but it is steady growth," says a chief financial officer from a leading industrial company, who requested anonymity.

Renewed InterestCredit may also be growing by more than what can be ascertained from the bank credit data. Two examples provide some substance to this perception, and market analysts say that they are just a part. The Steel Authority of India (SAIL) issued several hundred crore worth of three-month commercial paper at close to 3.8 per cent, a rate that almost betters what the government's 91-day Treasury bill can get. Similarly, market watchers point to Godrej Consumer Products as another company that raised commercial paper money of several hundred crore at near 5 per cent.

Commercial paper shows up under the investment account head of bank balance sheets — where government bonds are also shown — though technically it is equivalent to credit. Bankers we talked to say it will be difficult to estimate how much, given that bank investment portfolios are also chock a block with treasury securities issued as part of the very large government borrowing programme.

Sanjay Bhandarkar, managing director at NM Rothschild, a global investment bank and private equity firm, points out that today, company balance sheets are much stronger. "Many companies, who may have gone for debt restructuring, are now confident that current market would help them," he says. "February and March saw a lot of debt restructuring, renegotiated debt covenants; the following months have seen a dramatic fall." That seems to suggest that many companies could be funding capex from internal accruals.

Two Cheers...
If stockmarkets are any indication, confidence in the India story has returned with almost a bang. Capital inflows are regaining strength (see ‘Renewed Interest'), and already many analysts are talking of the Sensex reaching 20000 again by January next year, two years after it first breached that level. Investment banks and research coming out of broking firms are upgrading GDP forecasts more optimistically — perhaps even more adventurously — than at any time in the last year.

Is the worst behind us? Most of the answers range between "maybe", and "yes, perhaps".

In the fast moving consumer goods companies,  which have done well despite the downturn, there is a buzz about performance bonuses.

In some sectors, company managements are talking about hiring again. Once again, private equity firms are talking about investment opportunities.


 The name of the monthly report on unemployment produced by the US Bureau of Labour Statistics (BLS) has an unfortunately appropriate name: the Job Openings and Labour Turnover Survey, or JOLTS. And the latest one is a shocker, to say the least.

Since January 2008, unemployment has gone up to 9.4 per cent of the workforce. Heidi Shierholz of the Economic Policy Institute, a Washington DC-based non-profit think tank, writes in a report that at July end, there were 6.9 million job losses since the Great Recession started.

Other analyses show that the US has 131 million employed people, the same level as in 1999, implying that all the jobs that were created since then no longer exist. Another recent report — of the Organisation for Economic Cooperation and Development — suggests that if the recovery fails to take hold, there could be 57 million people out of work by 2010.

Shierholz's analysis suggests that the real scale of the problem may be much larger. Given population growth, the US economy needs to create 127,000 new jobs each month. That means in addition to the actual job losses, there were another 2.5 million jobs that needed to be created but never were.

To return to the pre-crisis employment conditions, a total of 9.4 million jobs would need to be created. In July, there were 12.1 million more unemployed workers than there were job openings, or six job seekers to every available job. It is a job that would take years to get done.

At the same time, there is also some caution: people are not jumping the gun too soon. Most recognise that overall savings will be low; household savings are stable, corporate savings have fallen as profitability has been dented, and government's savings are more negative as expenditure has grown, even though a considerable amount of that expenditure has fuelled consumption.

Despite the travails of the global economy, foreign investors seem happy about doing business in India, both portfolio investors and companies looking to set up businesses here. As an anonymous wag puts it, being happy is not about being perfect, but looking beyond the imperfections. So it seems to be with the Indian economy at this moment.

With inputs from Sreevalsan Menon