INDIA: Slowdown ahead, say macro-indicators

PARVATHA VARDHINI C.

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The OECD Composite Leading Indicators Index, which has 6-9 months lead time, and other indices too seem to indicate tougher times ahead for the Indian economy.

India Inc.'s performance in the June quarter shows that sales and profits have grown at a decent clip with CNX 500 companies witnessing a 29 per cent expansion in sales and a 9.5 per cent growth in profits. But the question for stock market investors is whether this growth will continue. Right now, signals emanating from the economy hint that the current pace of growth is unlikely to linger. If stubborn inflation, rising interest rates and a slowing factory output are not reasons enough, growth blues in the European and US economies are not doing any good to the 'India' growth story.

LEAD INDICATORS COOL OFF

What lies ahead for Corporate India? A good advance indicator of the pulse of the economy is the OECD Composite Leading Indicators (CLI). The OECD Index, based on a country's industrial production, is designed to signal turning points in economic activity, about 6-9 months before it actually happens.

For example, back in February 2009, when pessimism was still high in the air, the CLI pointed to a possible trough in economic activity in India, indicating the beginning of an upswing. Linked to this CLI, the OECD business cycle clock traces an economy through the four stages of expansion, downturn, slowdown and recovery.

With '100' remaining the long-term trend line, an 'expansion' implies that the CLI is above 100 and is displaying an increasing trend. If the CLI is still above 100 but is showing a decreasing trend, the country is said to be witnessing a 'downturn'. Similarly, a CLI below 100, showing subsequent falls month after month, indicates a 'slowdown' whereas a CLI below 100 but progressively rising, denotes a recovery. So, how is India positioned currently? According to this clock, the CLI for India moved out of the 'expansion' phase as early as July 2010 (100.9) and began its descent towards a 'slowdown' in October 2010 (100.2) itself. This has happened even as the IIP showed a robust 11.3 per cent growth during the same month.

Since then, the CLI has displayed a steadily decreasing trend, touching a new low of 95.7 points as per the latest available July 2011 report. Since the OECD index has about 6-9 months lead time, it seems the worst is yet to come for the Indian economy.

A second lead indicator of economic activity is the survey of purchasing managers of about 850 manufacturing and service sector companies across the country. Called the HSBC-Markit PMI (Purchasing Managers' Index), this study captures the trends in new business orders, employment, input/output prices, backlog of work and stock of raw materials/finished goods every month.

For August 2011, the PMI for the manufacturing sector slipped to a one-year low of 52.6, down from the peak of 58 recorded in April 2011 (the 50-point-mark differentiates expansion from contraction). The services PMI too recorded a one-year low of 53.6 points in August 2011.

Sub-components of the survey reveal that more bad news is in store, in line with the CLI. Consider this. For the over 1,500 listed companies, net sales grew at a healthy pace of about 26 per cent in the June 2011 quarter.

PAUSE IN CORPORATE GROWTH

But, going forward, top-line growth is likely to be constrained. That is suggested by the fact that purchasing managers, for five successive months since April 2011, have indicated weaker growth in new orders. New order growth in August has been the weakest in the last 29 months, pointing to a possible softening of domestic demand.

Numbers on the export order front are also not encouraging. Although the Government's export-import figures for June and July show high double-digit growth rates, the PMI's sub-index for new export orders had already slipped below 50 points (indicating a contraction) in July. The index contracted further in August, hinting at weakening prospects for export-oriented sectors such as textiles, gems and jewellery, etc. Auto exports too might take a hit.

The August 2011 manufacturing PMI gives out two other hints which support the proposition that volume growth might take a breather. One, after showing signs of slower expansion, backlog of work actually contracted for the first time since March 2010, pointing to lower capacity utilisation. This is in direct contrast to the situation of roughly a year ago, when backlog in work for both manufacturing and service industries showed a steady uptrend, leading to capacity constraints in a number of industries.

Two, the stock of finished goods has also decreased, attributable to a slower production growth and fall in inventory requirements. This apart, business expectations of the respondents over the next 12 months are less optimistic.

Hiring too has been reduced in recent months. The employment index for the service sector, for example, has contracted to below 50 in July and further down August, signalling successive monthly declines in staffing levels.

Finally, growth in intermediate goods, as captured by the IIP, has turned negative, at -1.1 per cent in July after several months of sluggish growth. Used as raw materials, a slackening demand for these intermediate goods from companies gives an advance indication of cooling off demand for the finished products.

SOME RESPITE

What might provide some relief to companies is that commodity prices, which hurt profit until the first quarter, have eased off quite a bit. But, with the demand moderating for rate-sensitive sectors and the PMI survey pointing to weakness in overall demand, the road to margin expansions may not be smooth.

Besides, survey respondents have already thrown hints at not being able to pass on the full impact of cost inflation to customers, pointing to a loss in pricing power.

At the net profit level, what could squeeze margins additionally is the lag effect of successive interest hikes. That said, big corporates have indeed reduced their leverage in FY-11, both by raising fresh equity and by repaying debt.

At 0.49 for the top 500 companies, the debt to equity ratio for India Inc. is the lowest in five years. That could do its bit to ease the interest cost burden. That the interest rate cycle in India is close to its peak also adds credence to this line of thought.

With Bold Moves, Subbarao Gets Reddy for Criticism

In his Predecessor's Steps: RBI guv has earned more critics than admirers in the past few months

When career bureaucrat Duvvuri Subbarao took the wheel at Mint Street in September 2008 at a time the financial world was crumbling, the popular belief was New Delhi would get a firm handle on monetary policy. The Lehman Brothers collapse and the 'synchronised' handling of the crisis between the government and central bank strengthened the belief. Three years later and the next crisis possibly round the corner, the story is different. Subbarao has earned more critics in recent months for supposedly killing growth, but a few admirers too for his conviction. Events are unfolding to create a landscape similar to the one that confronted his predecessor Yaga Venugopal Reddy — heaps of criticism for supposedly stifling growth and innovation. 
"It was unnecessary given the sharp deterioration in the global environment and a significant slowdown in domestic activity," said Tushar Poddar of Goldman Sachs after the governor raised policy rates 25 basis points last Friday amid slowing economic growth. A basis point is 0.01 percentage point. 
Industry was not far behind. 
"At a time economic policy should focus on the creation of jobs, it is unfortunate that the economy is being forced into a sluggish growth phase," said B Muthuraman, president, Confederation of Indian Industry. 
Subbarao, who parroted the policy stance of global central bankers during much of his first term, is deviating significantly. Policymakers in developed nations are keeping rates near zero and Federal Reserve Chairman Ben Bernanke has promised to keep it low till the middle of 2013. Most Asian central bankers have left rates untouched this month and Turkey and Brazil have cut interest rates. Subbarao is the odd man out by promising to keep raising rates till prices cool. Many admire his independence. "Subbarao is a pragmatic and astute central banker who has taken independent decisions based on his well-researched conviction," says Madan Sabnavis, chief economist at rating company Care. Warrior Caught in Padmavyuha
"He has recognised inflation as being the single most important malaise afflicting the economy and pursued the goal of increasing rates, notwithstanding the pressures being exercised from different quarters, displaying a lot of character." 
Industry has been seeking a halt to raising interest rates, which started with 'baby steps' in 2010 with the governor's public admission of confusion with reference to his position being similar to a warrior caught in 'padmavyuha', a battle formation that is easier to get in, but difficult to get out. 
The noise was loud enough to force him to declare last November that he would be putting the brakes on rate increases as manufacturing data showed weakness despite climbing prices. Industry and markets cheered, but it was short-lived. 
He abandoned the baby steps for a shock treatment by raising rates 50 basis points in July, double of what the market forecast. "What the RBI will have to consider is that interest rate tightening has not had the desired impact on inflation that we were hoping for. It is having an impact on growth," Kaushik Basu, chief economic advisor to the finance minister, said before the rate hike decision last week. 
The wildly-fluctuating Index of Industrial Production was presented as an argument for a pause. But Subbarao began to dig the surface. The economist in him found that data from the government was unreliable. A new series that was peddled by the government statistics department to be more reliable has been described by the governor as 'analytically bewildering'. 
ASSERTING RBI'S AUTONOMY 
It is not just his monetary policy actions by which Subbarao has asserted the central bank's autonomy. He has spoken out in public on some controversial issues such as the government's inability to rein in fiscal deficit, criticising banks that sold derivatives to unsuspecting customers and steadfastly resisting demands for investing foreign exchange reserves to build infrastructure. 
He has spoken out on other matters as well. "The establishment of a statutory joint committee is itself problematic and raises issues about its potential misuse in ways that impair the autonomy of the regulators," Subbarao wrote to Mukherjee expressing his reservations about setting up a council headed by the finance minister to reconcile differences between regulators. But on this, the government ultimately had its way. Monetary authorities, in an unwritten rule, do not comment often about government finances. But in the last few months when criticism mounted on the RBI for raising rates, Subbarao said the government was not helping much to contain prices. In effect, saying that those in glass houses shouldn't throw stones at others. "Beyond the short term, the threat to the independence of central banks emanates from factors apart from public anger... as countries contemplate exit from these expansionary policies, the familiar tensions between monetary and fiscal policies are showing up again," he had said. "Many believe that these tensions are temporary, and will melt away once recovery takes root... that may not well be the case." 
INCREASING TRANSPARENCY 
Transparency is probably a word that does not exist in a central bank's dictionary. The RBI is probably as opaque as most central banks, but Subbarao has taken 'baby steps'. One example is the decision to make public the minutes of the technical advisory committee meeting. It probably may not be as significant as it is in the West due to non-voting nature of the members, but it has helped in at least one way — to show Subbarao does not hesitate to differ. Twice he has gone against the majority view of the advisory committee. The steps towards greater transparency are not surprising given his agenda all along has been "to improve communication" and "de-mystify the office of the governor". 
"Since this governor has taken charge, the language in the policy statements has acquired much greater clarity as has the guidance for future policy actions," says Jahangir Aziz, Asia economist, JPMorgan Chase. 
Ever since taking charge of monetary policy, he knew part of his job was to hold a mirror to the government. "The central bank has performed the role of being an effective counterpoint to the government, which often has to concentrate on short-term objectives," he had said. "The Reserve Bank has been able to take a medium-term view and what is prudent and optimal comes out of this synthesis. We should continue to do that."

SPINNING MONEY ON THE WEB

Seven webpreneurs on how to make the online format work for you

*Figures are business estimates by online research agencies based on the adspend and traffic on the website. The entrepreneurs refused to share actual business figures

Saameer Mody|40 
Location: Mumbai Company: 1takemedia YouTube Channel: youtube.com/1takemedia Business: Distribution of "alternate content" ie. short films, documentaries, indie films, etc Started in: 2006; Joined YouTube: 2008 Before Google: Less than 1,500 viewers a day After Google:14 million views, adding 50,000 views a day Service Used: YouTube Partner Programme Money Matters: 9,460 a day* Google Gyan 
"Being online doesn't get traffic. You have to network offline. We are present at all film festivals, take part in seminars and connect via social media"

Rishi Sachdev|27 
Location: Yamuna Nagar Company: Aryan Florist Website: aryanflorist.com Business: Worldwide flower and gift delivery Started in: 2004After Google: 30-fold increase in order volumes Service Used: AdWords Money Matters: 46,000 a day* Google Gyan 
"Google should keep an eye on clicks from network partners to ensure that they are not spamming to generate more business for themselves. Once you have established your credentials, channelise towards search engine optimisation. The idea is to feature on the first page of Google for key search words"

MR Hari |47 
Location: Thiruvananthapuram Company: Invis Multimedia YouTube Channel: youtube.com/indiavideodotorg Started in: 1996; Joined YouTube: 2008 Before Google: Less than 1,000 views a day After Google: 50,000 views a day Service Used: YouTube Partner ProgrammeMoney Matters: Earned 25 lakh last year from YouTube alone Google Gyan 
"Google should update their view meter. Their counter for measuring views is not reliable. In certain cases, we know that the video has been watched by more than 1 lakh people but the counter shows 10,000. Using YouTube as the host server you save on bandwidth, server and security cost. Secondly, it rids you of all technical hurdles and saves manpower"

Name: Amit Agarwal|34 
Location: Agra Company: Digital Inspiration Website: labnol.org After Google: 4.5 million views a month and 1,25,000 subscribers Service Used: Google Adsense, YouTube Partner Programme Money Matters: Few crores per year Google Gyan 
"One area where Google can improve is "support." The premium AdSense partners do have dedicated account managers but the smaller publishers can only reach Google by email or though online forums. Also the YPP is still relatively new. Google can help in the training area so that the quality of produced content can get better. They do have initiatives like YouTube Next in the US — maybe they can introduce something similar here"

Amit Bhawani|27 
Location: Hyderabad Company: Digital World Solutions 
Website: 
techadvices.com (tech blog), mastergadgets.com (gadget blog), androidadvices.com (Android blog), helpfulhealthtips.com (health blog), autoadvices.com (auto blog), hyderabadadvisor.com (city blog) Business: Websites and blogs on technology, health, automobiles, city infoStarted in: 2006 After Google: 1.2 million views per day Service Used: AdSense Money Matters: 1.2 crore last year Google Gyan 
"Start with a generic brand name even if your blog is a personal blog. It's difficult to pitch a personalised blog (with your name) as a viable business brand to get advertisers in the future. Never under estimate the power of your social connections and start sharing your blog content with them which can go viral and help you reach a broader audience"

Hitendra Merchant |39 
Location: Mumbai Company: YoBoHo New Media; YouTube Channel: youtube.com/bollywoodbackstage,youtube.com/hollywoodbackstage, youtube.com/desimad, youtube.com/hooplakidz, youtube.com/ anandayoga, youtube.com/aniskitchen,youtube.com/nehabhasin Business: Video content on entertainment, health, cooking, children, etc Started in: 2008 Before Google: 30,000 views After Google: More than 2 million video views per day across 30 channels Service Used: YouTube Partner Programme Money Matters: Approx 30 lakh a month* Google Gyan 
"You'd be surprised as to what can get you more traffic online. For instance, a nursery rhyme gets us our maximum hits at 50,000 a day"

Raju PP|29 
Location: Bangalore Company: Techpp Website: techpp.com Business: Personal & consumer tech blog Started in: 2007 After Google: 2 million views a month, with 1.23 million unique users Service Used: AdSense Money Matters: 4,60,000 a month* Google Gyan "You have to scale the blog to stay topical. Extend your coverage area"