India's Most Influential Business and Economy Magazine - A Planman Media Initiative 
  Other Sections
  • Home
  •  Cover Story
  •  B&E This Fortnight
  •  B&E Indicators
  • B School
  • BE Corporation
  • Exclusive Column
  • International Column
  • Policy
  • Politics
  • Scrutiny
  • Sector
  • Stratagem
  • Testimonial

Share |
Cover Story
“There is minimal scope for fiscal stimulus this time”
Richard Rekhy, Head-Advisory Practice, KPMG
Issue Date - 02/02/2012
B&E: What is different between the economic uncertainty that existed in 2008 and the one that we face today?
Richard Rekhy (RR): Certainly, what we saw in 2008 was graver than what the world is experiencing now; but what is yet to be seen is whether we will end up in a similar situation. The key difference for India between 2008 and now is the health of the Indian economy. India entered the 2008 recession with strong economic grounding and close to 9.3% growth unlike today, where inflationary pressures have forced the RBI to maintain a tight liquidity stance resulting in a slowdown. India’s declining economic capabilities can be seen from a downward revision of growth from 9% for this year to around 7%. Growth has also indicatively slowed to 6.9% during Q2, FY 12 from 8.4% in the previous year. Furthermore, real investment growth decelerated to 1.2% in Q2, FY ‘12 vs. 9.6% in Q1, FY ‘12, while private consumption growth decelerated to 5.9% in Q2, FY ‘12 from 6.3% in Q1, FY ‘12. Also, the Index of Industrial Production (IIP), another indicator of industrial activity, fell by 5.1% in October 2011, the worst performance since April ’09. The sharpest ever decline in capital goods was majorly responsible for pulling IIP down. The Indian Rupee also emerged as one of the worst performing Asian currencies this season. Crossing the 50 mark, the Rupee touched a record low of INR 54.30/USD in the middle of December, 2011 – this plummet has further contributed to the woes of the Indian economy mainly through increased inflation leading to rising subsidy bills.

This brings us to the gravest part of this season – a growing fiscal deficit. Leaving a target of 4.6% (of GDP) much behind, the deficit is now expected to touch 5.5%. Particularly, a pessimistic growth outlook coupled with difficulty in achieving the disinvestment target for the year is expected to curtail the revenues of the government. Illustratively, only Rs.11.4 billion of proceeds have accrued at present of the Rs.400 billion of disinvestment revenue budgeted for the FY ‘12 and tough market conditions further could reduce the chances of significant divestments during this fiscal. This leaves minimal scope of a fiscal stimulus – which was the key pillar of the resilience that India showcased in 2008 – a major difference.

B&E: India’s own domestic market is showing more sombre sentiments and we are looking at the possibility of a slowdown. What is the outlook for the domestic economy and money supply in 2012 and do you see growth returning to 8% plus soon?
RR: From performance across some economic indicators, it is almost clear that India will in all likelihood not meet 8-9% growth this fiscal. However, the big change is the shifting of focus from containing inflation to fuelling growth. This also means a halt in the liquidity tightening stance of the RBI – essentially better liquidity. Also, there has been some recovery in services growth and FDI – which are indications of things getting better. Conclusively, growth, I believe is likely to be much better in the next fiscal. However, some of this will also depend upon how the global economy unfolds.

B&E: What will be the key challenges to Indian CEOs in 2012 in the domestic and the global market?
RR: Within India, the most important issue is a policy paralysis, which is making things worse. We have already seen a lot of big investments being hit by policy and regulatory issues. Land acquisition remains a hurdle for all infrastructure projects. High interest rates coupled with spiralling inflation is impacting consumer purchase decisions ranging from automobiles to consumer durables to real estate. Also, there are many opportunities for companies with cash to lead consolidation in sectors such as media and telecom, logistics, cement, retail and power. Globally, the challenge will be to find new markets for their goods and services now that their traditional markets in US and Europe are slowing down (especially Indian IT firms). They also need to fight off competition from Chinese firms targeting India’s exports in areas ranging from gems and jewelry to textiles. Furthermore, the worsening political climate in the Middle East can lead to conflict, which will lead to a surge in oil prices already nearing USD 100 per barrel. This will hurt consumer purchases all across the globe

B&E: Which turnaround strategies worked best for the businesses affected in 2008?
RR: Different sectors had to follow different paths to find their way out of the economic slowdown of 2008. The IT-BPO sector firms like TCS and Infosys focused on cutting costs by scaling back new investment for a few months. This helped them stabilise costs while the global economy recovered. Also, internal reorganizations were carried out; domestically they started expanding in Tier- 2, 3 cities to cut infrastructure costs, while globally, they tried to explore new markets like Latin America & Asia-Pacific. The financial services sector saw banks like ICICI Bank and HDFC cut down significantly on new loans, and strive to reduce the NPAs. Lots of debt recasts with clients were carried out to help them tide over the recession. Expansion was also scaled down, and many loss-making parts were shut down. On the other hand, auto sector firms like Maruti and Hyundai resorted to price discounts and lower interest rate loans to maintain sales. They also continued to come out with new car models to maintain buyer interest.

Share |

Leave your first comment


     Leave Comments to this story    
Email id:  
Busines & Economy is also associated with :
©Copyright 2008, Planman Media Pvt. Ltd. An Arindam Chaudhuri Initiative. With Intellectual Support from IIPM & Malay Chaudhuri.