Four bright spots in the economy

Looking for positive signs in the Indian economy today is rather like looking for a teddy bear in a train wreck. You have to be a determined optimist to find signs of life amid all that rubble. Here are four positive themes that can be unearthed from current trends.

Rural spending

The Indian Met Department didn’t forecast it and the Government had no role to play in it. But the munificence of the rain God has resulted in the South-West monsoon bringing in rainfall that has been 14 per cent above normal this season. The copious rains have lifted the area under key kharif crops by 12 per cent.

This will directly boost agricultural output, which is now forecast to grow by 2 per cent in 2013-14 as opposed to a 2 per cent decline last year. With agriculture contributing only 14 per cent of the GDP, this may be a small boost to growth.

But the trickle-down effect of this trend can be much more significant. Higher farm output combined with better crop prices (minimum support prices tend to rise in an election year) can deliver a big kicker to rural consumption. Higher rural spending can lift sales of FMCGs, two-wheelers, cars and durables, all sectors that have slumped into single-digit growth or even registered contraction in recent months.

Given that private consumption accounts for a much larger share of India’s GDP (55 per cent) than agriculture per se , a rural consumption boost has potential to push growth into a higher trajectory. Of course, overflowing reservoirs from the monsoon’s bounty are also set to improve power generation, a bonus to industry.

There are very few segments of the Indian economy that do benefit from a weak exchange rate. The Indian IT sector (software as well as BPO/KPO services) is one of them.

Improving IT fortunes

Now, despite the rupee’s decline, the software majors didn’t see a substantial improvement in their prospects until the March quarter of 2013 due to two reasons.

For one, then, the demand environment for IT services was pretty uncertain as both the US and European economies were still on shaky ground. But now, with economic recovery gathering steam in both regions, the deal flows for Indian IT services companies are reviving.

Two, given that no one expected this free fall in the rupee in recent years, the IT majors had been hedging their dollar revenues for extended periods of nine months to a year, by locking into fixed exchange rates. When the rupee headed decisively south, this move backfired, preventing them from taking advantage of the currency’s 13 per cent decline.

Now rendered wiser by the rupee’s plunge, Indian IT biggies have begun resorting to shorter term hedges (three-six months), which allow the benefits from a weak currency to flow through more quickly to their profits. This should stand them in good stead from this quarter onwards.

IT/BPO/KPO sector is one of the biggest employers in the organised sector. Therefore, improving prospects for the sector cannot but prop up consumer confidence among the urban workforce. IT majors, including Infosys, have recently announced 6-8 per cent wage increases for their India staff after a long hiatus. If this sustains, it will provide greater impetus to the consumption juggernaut.

Gold effect

If you’re a punter or a journalist who reports breathlessly on markets everyday, the 12 per cent plunge in the Sensex and the 13 per cent slide in the rupee in the last couple of months may seem quite cataclysmic to you. The market crash has, no doubt, erased a few zeros from the ‘net worth’ of ultra-rich gentlemen like Mukesh Ambani.

But we forget that a vast proportion of investors in India are largely untouched by the goings-on in the financial market. After all, they never put too much of their money in it.

Data from the RBI’s latest Annual Report shows that only a fourth of household savings flowed into financial instruments in 2012-13. Of this, 57 per cent was parked in bank deposits, while a mere 3 per cent went into stocks or mutual funds. Most of the non-financial savings, we know, went into gold and real estate.

While these investment choices have caused much chest-beating among policymakers, they have proved quite good for investors themselves. The falling rupee has actually bolstered the value of all that gold stashed away in the bank lockers. Domestic gold prices are up by over 15 per cent since May. Bank deposit rates too are yielding good returns, after the RBI’s recent liquidity tightening moves.

Imagine how much of an advantage this low equity allocation will be, if Ben Bernanke does begin to moderate his ‘money-on-tap’ policy next month and foreign investors do flee from Indian shares and bonds in droves!

Survivors Inc.

Today, you don’t have to look too far to know all that is wrong with India Inc. The aggregate picture does look ugly, with companies grapping with declining sales growth, a rising debt burden and high import dependence.

But thanks to diversity within corporate India, investors looking to stay the course can find companies that defy each of these trends. Among the top 500 companies, 25 leading ones have taken on mountains of debt, with debt-equity ratios of over three. But tucked away in the same list are 62 zero-debt companies with fairly large cash piles.

India Inc, in aggregate, is prodigious net spender of foreign exchange with over 270 of the top 500 companies, from sectors such as oil refining, power, steel and fertilisers, squeezed by a weak rupee.

But 140, from sectors such as software and pharma, gain from it as they earn dollar revenues. If 40 per cent of the companies suffered profit declines this fiscal, a third of them did expand their bottomlines by 15 per cent or more.

All this is not say that the Indian economy will soon bounce back to 8 per cent growth or that its companies will go back to double-digit expansion. A good monsoon, an upturn in consumer confidence or exports can only keep the economic engine chugging for some time. Without new investments that bring fresh capacity on board, this growth cannot be sustained.

But let’s just keep our fingers crossed and hope that recent incentives to boost capital spending will translate into some action on the ground. Only then can the journey resume, once the rubble is cleared away.

COMMENT NOW