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COVER STORYECONOMY TRAILS

SHALINI S. DAGARIMAGING BY PETERSON PJ

Indian economy is on a slow burn with growth almost halving in the

last 14 quarters and macroeconomic indicators showing a fragility

almost forgotten in the last two decades. We read the tea leaves.

“In the last nine years, since I started my business, I had not seen a single month of zero revenue ever. And this year, I have already seen two such months due to poor economic prospects,” says Shalabh Sinha (name changed), who runs a recruitment firm in Gurgaon.

Sinha is not worried though. In good times, he had behaved prudently—bought a large office space, built up a good buffer of cash and also organised alternate sources of income. All this, as he kept the business small and manageable. With no rent or monthly installments to worry him, Sinha seems well-fortified.

At a local mall in Delhi, shops which relied on the citizens acquiring a taste for exotic chocolate flavours or other fine tastes, are boarded with regular frequency. The slump in economic growth from 9.4 per cent to 4.4 per cent in the last 14 quarters is showing on the streets around the country. It is also showing up in the government coffers. And the government has not been as sensible as Sinha.

PUBLIC FINANCESAnaemic growth has ensured that tax collections are sluggish. A case in point,

corporate advance tax collections for the September quarter (FY14) grew at 8 per cent versus 10 per cent last year. This has happened even as the government com-mitted to higher and rather inflexible spends via traditional food, fertiliser and fuel subsidies and through entitlement schemes.

Continued on page 16

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1616 C F O I N D I A O C T O B E R 2 0 1 3

ing complete the volatile mix.With this miasma of uncertainty, is it

any surprise that investors remain wary of the once shining India story? Leave alone foreign investors, even India-based trans-nationals prefer to invest in other global destinations.

Girish Vanwari, partner and co-head, tax at KPMG points out that it is not the tough laws that deter investors. “Investors are able to digest tough laws and can adjust their business models but uncertainty makes it difficult for them,” he says.

Sentiment sours quickly and some-times irrevocably, when a government displays churlishness by overturning the highest judicial pronouncement and legislating a retrospective amendment, as was the case in the Vodafone tax dis-pute. Litigations with trans-national cor-porations are only proliferating.

Inflation has been an additional ugly bug bear. Global crude oil prices apart, retail inflation has been accentuated due to insufficient attention to supply side constraints. The purchasing power of the rupee has eroded both domestically and globally. The Indian rupee plunged by almost 40 per cent in the last nine quarters. Monetary policy, therefore, remains tight.

Global and domestic headwinds have converged to produce worrying macroeco-nomic numbers too—fiscal deficit in the range of 5 per cent of GDP and current account deficit at a stubborn and unprec-edented 4 per cent of GDP.

Nearly no reforms push with big bang measures such as Goods and Services Tax (GST) and Direct Tax Code (DTC), high profile graft, dysfunctional polity and an administrative paralysis in decision-mak-

“You cannot have high growth with high inflation alongside. Inflation hurts growth. It is a historical pattern.”

“Over the next one year, rupee volatility will continue and global growth will not be as robust as people may believe.”

— Subir Gokarn, Former Deputy Governor, RBI

— Anil Singhvi, Chairman, Ican Investment Advisors

2 21.5

0.1

-1.3 -1.3

-2.3-2.8 -2.8

-4.2-4.6

-1

0 0

-2 -2

-4 -4

-6 -6

INDIA CURRENT ACCOUNT TO GDP

Jan/04 Jan/06 Jan/08 Jan/10 Jan/12

source: www.tradingeconomics.com | Ministry of Finance, Government of india

INDIA GDP ANNUAL GROWTH RATEPercent Change in Gross Domestic Product

10 9.49.7

8.5

7.87.5

6.15.8

6.3

8.6

7.3

9.4 9.38.9

8.37.8 7.7

6.9

6.1

5.3 5.3

4.7 4.84.4

5.5

10

8 8

6 6

4 42008 2010 2012

source: www.tradingeconomics.com | Ministry of Statistics and Programme Implementation

Continued from page 14

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CHANGING NOTESIn the last few months, as the rupee

gyrated to Ben Bernanke’s pronounce-ments on the taper, the seriousness of the situation has even hit policymak-ers. Appropriate noises have ema-nated and there is a change in percep-tion at both the finance ministry and the RBI getting manned by serious professionals—P. Chidambaram and Arvind Mayaram and noted economist Raghuram Rajan at the central bank. Furthermore, there has been a flurry of legislative action with bills on land acquisition, food security and pen-sions getting passed.

In the power sector, fuel supply agreements (FSAs) with 173 power projects, totalling a cumulative capacity of 78,000 MW need to be signed, as per Supreme Court guidelines. Power min-istry points out that 146 FSAs, totaling about 65,000 MW, have already been signed. These FSAs are for projects that have either been commissioned before March 2009, or will be commis-sioned by 2015.

Jyotiraditya Scindia, MOS Power says, “Barring a few issues with some companies, we are well on track. Some companies have not completed their milestones with regard to for-est clearances, land issues and equity investments. Some companies have undergone a name change and a sale prior to signing the FSA in violation of the agreement.”

The Cabinet Committee of Invest-ment has so far cleared 209 projects with an aggregate investment of Rs 3,84,203 crore. Seven stalled mega infrastructure projects, envisaging an investment of Rs 1.6 lakh crore are under consideration.

A good monsoon and the prospects of a bumper harvest have provided further fillip to the optimists. With the U.S. Federal Reserve continuing to keep the liquidity taps open for a little longer, India has some reprieve.

Has this change been noticed by the investors? Or are they dismissing it as pure optics?

“We (Indian economy) are still an Ambassador car. We are not a Mercedes car which you can drive at 250 km per hour.”

— Deepak Bagla, Partner, 3i India

2011-06-30 2012-04-30 2013-02-28

70 70

65 65

60 60

55 55

50 50

45 45

40 40

RUPEE MOVEMENT VS THE US DOLLAR

-3

-4 -4

-5 -5

-6 -6

-7 -7

-8 -82004 2006 2008 2010 2012

Percent of the GDPINDIA GOVERNMENT BUDGET

-3.477 -3.294 -3.272-3.5

-3.1

-7.8-6.9

-5.1

-5.8-5.3

source: www.tradingeconomics.com | Ministry of Finance, Government of india

source: www.tradingeconomics.com | Ministry of Finance, Government of india

COVER STORY

THE NEUTRAL, INVOLVED VIEW

“The decision paralysis is certainly over. There is a spate of action,” says Vinayak Chatterjee, chairman Feed-back Ventures, an infra consulting firm. Chatterjee believes a “public-expendi-ture driven construction-led revival” is in the offing. He is expecting construc-tion contracts worth Rs 90,000 crore along freight corridors, DMIC and in the roads sector to push through a reviv-al in the next couple of years.

Investors such as Deepak Bagla, part-ner, 3i India, too are more sanguine about the India story. “We have spent nearly $900 million in India and we have faith in the Indian system. We have not exited a single investment in India and not that we cannot,” he says. The 3i India Infra-structure Fund was widely publicised as having quit India. Bagla counters that the fund merely came to the end of its invest-ing period in India with the remaining funds being set aside for top-up invest-ments and expenses. “As a global inves-tor, ironically, it is the best time to invest in India. Private equity funds of 2013-14 vintage will be outperformers,” Bagla adds. He will, however, wait for the India investments to mature before pushing for another India fund to skeptical global investors, whose appetite for emerging markets and infrastructure has waned in recent times.

Bagla believes the India infrastruc-ture story is a case of structural imbal-ances that get created when there is rapid economic growth for a few years. “It is the first time in the economic history of mankind that private money is being used to create infrastructure in such a broad-based manner. So there are bound to be learnings on all aspects for all economies,” he says.

Infrastructure, which has been a key constraint area for Indian economy, will probably come through in the long term. In the near term, worries persist. DK Srivastava, CFO, Matrix Clothing, which focuses on exports is not very pleased with a sliding rupee as he says that is no guarantee of an uptick in demand in global markets. “The mar-ket dynamics are challenging. We are now facing another challenge as buyers want to re-price contracts,” he adds.

It may sound perverse, but there is enough opportunity even in this down-turn. Vinod Agarwal, country head of Guthy Renker, a direct marketing con-sumer products company has little rea-son to be glum. The company which relies heavily on marketing and has 35 per cent of its cost being accounted for media buying, has seen the market softening. “We are pushing for lower media costs and it seems to be work-ing. On the demand side, at higher price points, demand is relatively

inelastic. Our numbers substantiate the story,” he says.

GOING FORWARDSeveral sections of the economy, how-

ever, have trained their eyes on the new RBI governor Raghuram Rajan. There are diverse views on his repo rate increase of 25 basis points in the battle against inflation. While some believe he is doing the tough but correct thing for long-term structural strength, others worry about the enormous human costs such a policy will engender. For now, real estate devel-oper Purvankara Projects’ CFO, Anil Kumar, does not worry about the quan-tum of the hike affecting demand just yet as the southern markets are relatively stable. Yet, he does worry about higher borrowing costs.

For India Inc as a whole, the cost of funds has gone up enormously in the last few years. Noted economist Rajiv Kumar believes higher interest rates do not serve any purpose. “My take is that retail inflation will not come down with these measures, and high interest rates with low growth will weaken the econo-my further.”

Credit growth numbers have been fal-tering in mid-teens for sometime. “We will see the targeted fiscal deficit but on much lower growth numbers if the tight monetary policy continues,” said a Mum-bai-based banker. That may well be the case. Sinha’s recruitment firm recently got loads of positions to fill. Indian com-panies are outsourcing their recruitment and HR to outside vendors. That perhaps means layoffs, but for Sinha, it may also be the next big trend which he can ride to a prosperous future.

As 3i’s Bagla sums it up, “India is not a highway on which you drive straight if you want to invest in India. It is like any emerging market, a stream which you cross by taking off your shoes and feeling the pebbles.”

Well, the water seems to be rising... And the pressure to get safely to the other side quickly is high.

Additional reporting by Parimal Peeyush

“Out of the 173 fuel pacts that are to be inked, there

are about 10-15 projects where the milestones have not been

achieved.”— Jyotiraditya Scindia,

Union Minister of State, Power