CIRCUIT BREAKER. It’s time India Inc stopped whining

As Modi completes one year in office, corporate chiefs have been quite free with their critique and advice on what the Centre needs to do to rev up growth. There has also been some cribbing and carping about how the Modi government has failed to revive consumer demand, kick-start capex, reduce borrowing costs and generally lend an ear to corporate chiefs wanting to air their numerous woes.

But why should reviving corporate fortunes be the government’s responsibility?

Thanks in part to the fortuitous collapse in crude oil and in part to the Centre’s brisk pace of reforms in some areas, the Indian economy is already in revival mode. Revised GDP data show that growth has already revved up from 5.1 per cent in FY13 to 7.4 per cent in FY15, with a rebound to 8-8.5 per cent projected this year.

Corporate India, especially the listed segment, has always prided itself on growing at a multiple to the overall economy. Yet, this time around, it seems to be missing the bus.

A recent study by Crisil on ‘modified expectations’ pointed out that while GDP growth had revived, 69 per cent of India’s top 500 companies failed to even keep up with nominal GDP growth rates in the first nine months of 2014-15. This is proof enough that, far from complaining, Indian businesses should introspect to see what they may be doing wrong.

Take weak consumer demand, which is showing up in sluggish sales for companies vending a gamut of products from two-wheelers to fashion apparel. Aggregate sales for 700-plus listed companies that have so far declared their March 2015 numbers grew by just 4 per cent, a third of the growth rate they managed in the same period last year.

Now, if there is one macro variable that had shown dramatic improvement under the Modi regime, it is consumer price inflation. After remaining lodged at 8-10 per cent for six consecutive years until 2013-14, it moderated to 6 per cent in 2014-15 and has remained subdued since. This fall in inflation rates is bound to have unleashed significant savings for households.

If this isn’t translating into sales for certain sectors, isn’t it up to businesses to address this?

To induce consumers to spend, consumer-facing firms may need to improve the value proposition that they offer. This will mean ceding pricing power. The high-inflation environment of the last seven years allowed consumer businesses in India to grow their topline through the easy expedient of hiking their selling prices every so often.

This honeymoon period is now officially over. With inflation trending down, companies now need to rework their strategies to drive volume growth, be it through product innovations or through discounts.

Taking such price adjustments is far easier for firms now than it was a couple of years ago. The global commodity price meltdown has decimated costs for a wide range of industrial inputs in the last three years. An IMF index which tracks the prices of key industrial inputs has, for instance, fallen 60 per cent from its peak of April 2011.

This suggests that corporate India has already received the stimulus it is asking for, in the form of benign inflation. It is up to it to use it to drive consumer demand.

Then, consider the complaints about the stalling investment cycle. Since its ascent to power, this government has done a fair bit to smooth the way for stalled private sector projects — moving to transparent allocations of coal blocks, making prospecting easier through the new mining bill, re-negotiating road contracts, fast-tracking environmental clearances and so on. Despite fiscal constraints, it has also stepped up public spending on infrastructure by 50 per cent in the recent Budget.

Concrete progress on fiscal consolidation and falling inflation have also persuaded the RBI to reverse its hawkish stance on interest rates, with a 50 basis point cut in rates already effected this year.

If private capex continues to stall despite all this, the onus seems to lie squarely with companies themselves. For all the talk of ‘ease of doing business’, the real reason why cash-rich private firms aren’t in a hurry to put up new projects is that it doesn’t make commercial sense for them to do so.

Sectors such as steel, power, cement and automobiles are plagued by significant over-capacity after taking on overly ambitious expansion projects during the upturn of 2007-08. Until capacity utilisation on the older facilities improves, it would be un-remunerative for these players to invest afresh.

In sectors such as infrastructure or power, private players are to be blamed for underestimating business risks, relying on political connections and taking on exorbitant amounts of leverage to see their projects through. This problem of high leverage is not a systemic one, but concentrated with a handful of corporate groups.

Whether these players can emerge from the morass will depend on their ability to de-leverage through asset sales, attract equity infusion and find new investors who can take on the mantle of legacy projects. A part of the burden for this profligacy is already being borne by the public sector banking system.

There is very little else the government can do about it.

A final complaint that export- and import-oriented firms seem to have with the government is that it is doing very little to curb rupee volatility. Here again, both the RBI and the Centre have taken significant policy actions to improve the fundamental underpinnings of the rupee. RBI’s corrective steps in 2013 have paid off both in the form of a much lower current account deficit and a comfortable forex reserves position. Declining crude oil prices have in fact enabled India to retain those benefits even while relaxing the earlier curbs.

The Centre on its part (both under UPA and NDA) has made material progress on reducing its own reliance on foreign currency loans, with its external debt falling from 5.1 per cent of GDP in 2009 to 4.5 per cent in 2014. This places India at a relative advantage over emerging market peers, at a time when global investors are fretting over sovereign defaults.

But the story is different for corporate India, which has been quite profligate with its foreign currency borrowings. India Inc’s forex loans have risen from 15.2 to 18.7 per cent of GDP over the last five years and do pose default risks in the event of sudden rupee weakness. To top it off, many Indian companies with loan exposures do not actively hedge against currency risks, leaving them exposed to any global bout of currency volatility.

Overall, this suggests that the government and the Indian economy have already shaken off their much-debated paralysis and are ready to move on. It is corporate India which sorely needs to shed its paralysis and work on its game-plan.

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