As the trajectory of India?s economic growth continued to slide despite the announcement of a fiscal stimulus package last month, a second one had to come. It did on the second day of this month, targeting ailing industries such as auto, textiles, real estate and infrastructure?sectors that were addressed in the first round too. Sops were also announced for exporters as Reserve Bank of India (RBI) timed the announcement of its monetary measures just before the new package was unveiled. The idea was clear: Revive sagging demand somehow. But the point is: will domestic demand really take off with these measures? Will the cycle of growth be restored?
Experts opine that revival may not be in the offing soon enough. That?s because confidence of stakeholders? lenders, consumers and business in general?remains weak. ?All of this is a result of the environment that prevails currently,? says D K Joshi, director & principal economist, CRISIL. ?Sentiment is bound to be low.?
It doesn?t help when key figures are in the red. Production is down and so are exports (See graphic). Though the finance and commerce ministries as well as the central bank have been proactive enough since the September 2008 financial crisis, which triggered a worldwide slowdown, attempts to revive the economy haven?t yielded the desired results.
Despite the government?s optimism of achieving a growth of about 7% in the Gross Domestic Product (GDP) this fiscal, chances are it could be below that, at about 6.5% only. But that is one part. The bigger issue is managing growth in the next financial year. Says Jagannadham Thunuguntla, equity head at the New Delhi-based merchant banking company SMC Capitals Ltd, ?We are in the last quarter of this financial year. There is hardly any room left to manoeuvre at this stage. In my opinion, the bigger challenge would be managing growth in the next fiscal.?
Both corporate chieftains and industry experts are already predicting that GDP growth in the next financial year will not cross 6%. That is abysmally low for an economy that has been growing at a steady clip of about 8% for the last few years, more so between 2003 and 2007.
How buoyant sentiment was in this period is reflected in the inflow of foreign investment during those years. Foreign institutional investment or FII inflows steadily picked up from $6.59 billion in 2003 to $8.51 billion in 2004 to $10.7 billion in 2005. It dropped marginally to $8 billion in 2006, more than doubling, however, in 2007 at $17.24 billion.
Foreign direct investment was even better. Considered to be steadier than FII inflows, FDI moved from $6.2 billion in 2001-02 to $18.9 billion in 2005-06. It touched $23 billion in 2006-07 going up to $32.3 billion in 2007-08.
Having seen all this growth, it obviously pains many including the ones sitting in power to see the overall pace of the economy as well as investment in general slow down. FII outflow, in 2008, for instance, was $13.2 billion.
Though the outflow in part was triggered by the credit crisis in the US and Europe, restoring confidence in India?s growth story remains the key challenge for policymakers. That?s why the stimulus package is so relevant and important at this stage.
Round one saw the government announce an approximately Rs 28,000-crore package on the back of a 4% cut in excise duty and there are plans to raise public expenditure by Rs 20,000 crore in the current fiscal for key infrastructure and rural projects. Round two, in contrast, has been more of a facilitation drive, say industry experts, aimed at providing the much-needed relief to key sectors.
Exports, in particular, have been a key thrust area in both the stimulus packages. It?s not without reason. Though export numbers for the month of December 2008 have bucked the downward trend of the previous two months, the likelihood that India will touch the $200-billion-mark by the end of the current fiscal is unlikely. Estimates are it will be just about $175 billion primarily on account of the worldwide contraction in demand.
Garment exports, for instance, have fallen considerably since October 2008 mainly due to diminishing demand in the US and Europe. ?The situation is tough,? says Nitin Kasliwal, vice-chairman & managing director, S Kumars Nationwide Ltd. ?Textiles are exported significantly out of India. Indian textiles contribute 6-7% of the world?s total production. In a slowdown, however, business is bound to be impacted.?
If that is one part, the textile industry believes there are issues that haven?t been addressed adequately. Says Karthik Krishnan, head of corporate strategy, Arvind Mills, ?The current package doesn?t speak about the minimum support price of cotton. It was raised by 40% in September-October last year at a time when cotton prices were falling worldwide. That doesn?t make us competitive in the international market.? Interest subsidy to exporters, argues Krishnan, has been provided to the extent of 2% only. ?It was 4% earlier before being reduced to zero. The restoration has been partial. It doesn?t help,? he says.
As demands mount with each round, observers opine that not everything can be addressed in one go. ?The objective of the two stimulus packages has been to prevent the slide further in the economy,? says an analyst based in Mumbai. ?There?s a limit to which the government can go in this regard.?
That?s because the fiscal deficit of India?s GDP is already stretched. It was 5.2% in the last fiscal.This year it is likely to touch 5.5% on account of the cuts and sops the government has been giving through its packages.
Quite clearly constituents then have to act within the given framework. Are they willing?
Banks in particular have been wary to lend. That is what has been troubling industry ? something that the government and RBI ? have tried to address in the last few months.
Almost Rs 2 lakh crore has been pumped into the system on the back of rate cuts in the last few months. More cuts are likely in the near term as inflation oscillates in the region of about 6%. Says R C Bhargava, chairman, Maruti Suzuki Ltd, ?There?s no denying that liquidity has improved. Inflation was a challenge earlier. It?s no more the case now. That has spurred the central bank to bring down rates.?
But the availability of finance has yet to improve despite measures by the government to perk up the line of credit to non-banking finance companies not to mention its moral suasion to banks to disburse loans freely.
Loan giving, for the record, is not high enough to get consumers back into the marketplace. Says Joshi of CRISIL, ?Banks fear that delinquencies will go up if they give loans freely at this point.? The uncertain environment and lack of job security is adding to the fear.
In auto, for instance, a sector heavily dependent on finance, manufacturers maintain that banks have become selective in disbursing loans. ?Banks were providing loans to all user profiles earlier. It has come down now,? says Arvind Saxena, senior vice-president, sales & marketing, Hyundai Motor India Ltd. Says Bhargava, ?Not everybody has money to pay upfront. People are dependent on loans.?
So a reduction in interest rates is clearly not enough, say players across the board. Availability of finance must go up. That is likely to happen some time in the second half of 2009, say experts, when lending rates come down further on the back of rate cuts. A mild revival in interest-rate sensitive sectors such as consumer durables, auto etc may happen then. But not without manufacturers yielding to the environment and lowering prices at the same time. ?Demand will revive when falling prices meet falling interest rates,? says Hitesh Agrawal, head of research at the Mumbai-based Angel Broking.
That?s what happened to automakers in December 2008. They brought down prices considerably then. A key reason, of course, was the 4% cut in excise duty, which allowed many to announce steep price cuts in addition to the year-end discount schemes that were running anyways.
That helped bring consumers to the marketplace. Though overall industry numbers for the month of December ?08 weren?t substantial, it was still better than the previous months, when demand was stagnant. Maruti, for instance, claims to have seen a revival of about 15-20% last month. Hyundai says the revival was about 8-10% in its case. All of this because prices were so attractive that consumers saw sense in making purchases then.
This is something that real estate players haven?t being doing enough. A correction of 15-20% has happened in prices so far. Buyers are expecting more. As they wait in anticipation, builders are turning to the government to break the deadlock. Says Rohtas Goel, chairman & managing director, Omaxe Ltd, who also heads the National Real Estate Development Council (NAREDCO), ?Not all the demands of the industry have been met. There are a few key proposals, however, which have been considered, like permitting external commercial borrowings for integrated townships. That is important for an industry that is cash-strapped. The government will also work closely with various states to offer land for low and middle income housing. That?s important too because if land prices are reasonable that can help us bring down our overall costs. The impact will be felt by the end user.?
The hope is that all of this will help get buyers back into the marketplace. But are they willing when builders are still holding on to their prices firmly? Says Anuj Puri, chairman & country head of property consultancy Jones Lang LaSalle Meghraj, ?I expect a fall of about 10-15% more. If prices can come down to 2006 levels, that is, 30-35% lower than what they are now, I think demand will pick up.?
That?s a question mark given that builders in general are hoping that banks lower their interest rates to such an extent that it influences demand. Says Goel, ?If interest rates of 8.5% and 9.25% on loans up to Rs 5 lakh and Rs 20 lakh are lowered to about 6% and 7.5% respectively, it would indeed help. In my opinion, there is room for correction in interest rates.? Adds Pradeep Jain, chairman, Parsvnath Developers, who is also the president of the NCR region for the Confederation of Real Estate Developers Association of India, ?Our key demand was that lending to the housing sector go up from Rs 20 lakh to 30 lakh. That would have made a big difference to those who are looking to get a loan. Increasing the income tax exemption from Rs 1.5 lakh to Rs 3 lakh would have again helped salaried individuals who take up loans aggressively.?
Since the government hasn?t heeded these requests, the point is: will builders blink and bring down their rates? Only time will tell.