ALL TROUBLES.....India Inc jittery.....

Clifford Alvares & Dev Chatterjee  |  Mumbai  September 2, 2013 Last Updated at 12:25 IST
Is this the end of the India story?A sagging economy, Indian rupee is making India Inc jitteryWalk into any CEO's office nowadays and one can sense the gloom in the air. Everyone is worried about India right from bankers, economists to corporate leaders both in India and abroad. The signals from India is not very encouraging as Indian companies are making plans to set up shop abroad as things go from bad to worse with the economy and currency. The Indian economy is falling short on just about everything that it needs to do to see it sail through this choppy weather. The latest casualty is the dip in the GDP growth numbers that came in at 4.4% for the first-quarter as against an expected 4.7%. Thirty basis points might not look like a lot when the sailing is smooth, but against the backdrop of slowing numbers, it's a huge set back; and a tremendous under-achievement for a country that was pacing growth at close to 7% even after the Lehman crisis.The shocker has come at an especially fragile moment. Since May this year, the Indian foreign exchange market has been a scene of carnage. Against the once sufficient cushion, millions of foreign exchange reserves have been wiped out as the Indian currency fell from Rs 54 to a dollar to Rs 68 last week. The import cover that finances our food and oil has halved in a few months from 10 months of supply to five. The circulation of money from banks to India Inc and the other way around has been tightened to save therupee, but it leaves businesses and the economy to suffocate slowly.Worried India IncAlmost on a daily basis, corporate leaders are warning that things are getting worse and the government must get its act together.Normally a reclusive, former chairman of Tata group Ratan Tata went public to say that the leadership deficit is aggravating economic problem. Almost all India Inc leaders including Rahul Bajaj, Anand Mahindra, Kiran Majumdar Shaw, Krish Gopalakrishnan, Deepak Parekh have said the government has lost control over the direction of Indian currency and it needs to expedite reforms. A $20 billion bill to feed India’s hungry will further deepen the economic crisis, they say.“I am disappointed not surprised with the way rupee is falling”, says Rahul Bajaj, Chairman of Bajaj Auto and one of Corporate India’s vocal voices. “We are paying for the last four years of inaction and absence of reforms. The government has spent a lot of money in loan waivers, NREGA and Food Security Bill and all these populist measures have now added to the deficit”, he said. “We are not opposing pro-poor moves. We are against populist measures. We should be treating the disease and not the symptom. Now is the time to change policies,” he said.Corporate chiefs raised the alarm bells when the rupee sank to an all-time low of Rs 68 a dollar last week and together echoed a highly critical view of the economy. India, once a poster boy of growth and democracy going hand in hand together, is now losing its gleam in the global economy.Analysts are pondering over the usual questions: How much impact the rupee's fall will have on the Indian economy and companies? How much will the Indian economic growth slowdown? Will there be a revival?But that sidesteps the big picture. Is this the end of the India story?Recession ahead?Interest rates in the short-term are higher than long-term interest rates, and in classical economics when this happens, the yield curve usually points to a recession.Says R Sivakumar, head fixed income, Axis MF: “Whenever the short-term rates shoot up in classical economics, it is usually followed by a recession. There's clearly a case that we should be worrying now.”Everywhere you look, the signs of a tapering growth are visible. Companies that borrowed heavily to build new roads and bridges are being crushed under the burden of heavy debt as revenues taper off and interest costs pile up. Banks are facing the tailwinds of the slowdown as their gross non-performing assets ballooned 75%.It's a bill that could cost India Inc a lot. Any good banker will tell you that rising delinquencies have to be priced into the new loans so that bad loans can be written off. If that happens, the interest rate cycle could be in a prolonged upswing, further jeopardising the recovery.Rising ratesIndian companies are also worried about rising interest rates which has made loans costlier. With the rupee falling, raising dollar bonds is a good option but only for those companies which have sizeable exports.Rising finance costs have made many Indian companies sell assets abroad to recast their loans in India. This includes Videocon selling its oil assets in Mozambique for $2.5 billion, and JSW planning to sell its pipe making unit in the United States. Many other Indian companies are looking at selling assets so that they can pay back loans in India.Delhi-based Jaypee group is close to selling its Gujarat cement units at a discount to the Birlas to cut its massive Rs 59,000 crore of gross debt. DLF and Adani have already sold assets to pay loans early this year.As it is, profit growth in the first quarter for the Nifty companies has slowed down to 4% as against 15% two years ago. Analysts contend that if the high interest rates continue, the Indian economy could be heading for further trouble as companies will not be able to borrow to finance their working capital requirements during the busy season policy that starts around the festive season of October and goes on till March.What's worrying economists and CEOs is the rising fiscal stress that the government finances are going through. On the one hand, India's expenditure is rising and some of it will be fueled by the rising government expenditure. Moody's recently warned that the food security law is negative development for the country's sovereign rating.“The measure is credit negative for the Indian government (Baa3 stable) because it will raise government spending on food subsidies to about 1.2% of GDP (gross domestic product) per year from an estimated 0.8% currently, exacerbating the government’s weak finances.”As if that's not enough, India's current account that was running a surplus of $14 billion in 2003-04 has raked up a deficit of close to $90 billion, and is now equal to nearly 5% of the GDP, twice more than the sustainable levels. Further, FDI has dipped from $48 billion to nearly $27billion last year. Finance minister said that the immediate priority of the government is to contain the fiscal and current account deficits in the current fiscal year to around 4.8% of GDP and the current account deficit at $70 billion this year.But the fiscal deficit numbers in the April to July period is already at 62.8% of the budget estimate and it does not take into account the food subsidy expenditure of food bill and the rupee depreciation impacting the oil imports.On the other hand, the government's income from various sources such as corporate tax has slackened. For instance, corporate tax growth was 2.7%, however, it’s far short of the budgeted growth rate of 17%. Excise duty fell by 18% as against a rise of 17% expected. Analysts expect that it's more than likely that there will be a mismatch in governments finances, which it can ill-afford now. If the income falls short, and expenditure rises, the government runs the risk of clocking a higher deficit by the time the next year's budgets are announced. Rating agencies will be watching these numbers. If there's a sharp deterioration in these numbers, the government might be faced with a default. When the government’s fiscal excesses are accounted for. This would also be the time when the rating agencies would re-assess the Indian government's financial situation. Says Amandeep Chopra, group president, head fixed income, UTI Mutual Fund: “There's an outside chance that India's ratings could downgraded. By the year end we will know how the government can manage its finances and whether there's a risk of a downgrade. But the risk is on the table.” The Indian economy is in a very fragile state. For long, the country has been relying heavily on hot money that chases only yields and is never permanent. Foreign investors will not hesitate to pull out money when the going is tough, and they did. India needs more permanent foreign dollars and that will only come if businesses are allowed to grow and prosper.The road aheadWith a general elections coming, CEOs and analysts are not very optimistic that the Prime Minister Manmohan Singh will be able to get any reforms off the ground. FDI in retail has been a non-starter; no news of hiking FDI in insurance, and there are no takers for FDI in defence.In spite of PMO’s clearance of stalled projects – now at a massive $120 billion – none have taken off so far. Corporates are not bidding for billion dollar infrastructure projects like Sewri-Nhava Sheva sea link project as they say the land acquisition laws and environmental clearances are making projects unviable.The only good news so far this year has been good monsoon rains which will boost agriculture production. Companies, across all sectors, meanwhile, are either cutting jobs or are freezing appointments.  The CEOs are already warning that the lag impact of a falling rupee and rising crude oil prices will stoke inflation."The Indian economy is in a sorry state and we are now paying the price of a confused and conflicted coalition that has prevented any meaningful economic reforms. Added to this is the lack of political will to implement key infrastructure projects in power and transportation, thanks to various green lobbies. Activism rather than evidence/data is driving decision making which is reflective of weak leadership. Any corrective action will only realise results when the next government takes charge," says Kiran Majumdar Shaw, CMD of Biocon.The government officials, meanwhile, are saying that the rupee fall is in line with a similar fall in currency in other emerging markets. The Finance Minister P Chidambaram said the economic growth is still far higher than other countries and government is taking all steps to revive the economy.But, as of now, no one is listening.http://www.business-standard.com/article/companies/is-this-the-end-of-the-india-story-113090200250_1.html