Young Investor

How India Inc went from boom to gloom in 2011

M. V. S. Santosh Kumar | Updated on March 12, 2018 Published on December 24, 2011





Turbulent times for the aviation sector, the ongoing debate over FDI in retail and steady hikes in policy rates were the highlights of the year that is coming to an end.

If you are wondering how, in 2011, we went from a high growth phase to the current slowdown, and from a heady stock market to a moribund one, here is a quick roundup of sector-specific changes that impacted India Inc in 2011.

They could continue to have a bearing in the year ahead as well.

Banking: Buffeted by higher rates

Draft guidelines for new bank licenses that may unleash more private banks and rising interest rates were the big challenges for the banking sector this year.

While it may take a while before new banks are set up, it is a significant step given that only a handful of banks were allowed to set up shop in the previous decade.

Apart from steady hikes in policy rates which pegged up the costs for banks, RBI also hiked interest rates on savings bank accounts.

First, during the annual credit policy, RBI raised the savings bank deposit rate to 4 per cent from 3.5 per cent. Then, in October, the rates were de-regulated completely.

This means that during the time of high interest rates, a depositor may get a better rate than 4 per cent. Banks with low savings bank deposit rates have hiked their rates already whereas the bigger players continue to adopt wait-and-watch approach as it will deliver a hit on their profits.

Mining: Sharing the spoils

The new Mining Bill which awaits Parliament's approval asks the mining companies to let go a proportion of their earnings for the development of the local population.

The amount to be set aside in a District Development Fund, which in turn would improve the living conditions of the locals, amounts to 26 per cent of profits in case of coal mining companies. For other mining companies, the outgo equals the royalty paid by them on mining.

Expectation of lower earnings because of this coupled with fall in mining production due to ban of mining at a few locations, strikes, inclement weather in mineral-rich States and environmental hurdles has led to underperformance of the mining sector.

Power: Short-circuited

The ‘Power for all by 2012' dream may turn into a nightmare in spite of new power projects coming up. Low fuel (coal and gas) availability and mounting losses of electricity boards lead to their shying away from procuring power at high cost.

Power generation has consequently suffered.

This means higher power cuts for consumers. Additionally, the power projects which are fuelled by imported coal are also in a soup. Due to recent regulatory changes in fuel procurement globally, many projects may become unviable.

For instance, Tata Power's mega power projects, which were expected to provide relatively cheaper power may now have to book losses as the fuel costs have risen more than what was projected earlier.

Even as the company is negotiating for higher tariffs with the electricity board, Tata Power booked impairment loss of Rs 823 crore on its Mundra power project.

PSUs: No fund raising

‘Selling the family silver to pay the butler' may not happen as planned this fiscal.

Of the Rs 40,000 crore the Government of India planned to raise this fiscal from selling stakes in leading public sector units (PSUs), it has raised only Rs 1,125 crore in the first nine months.

With only three months left to achieve 97 per cent of the target, it seems unrealistic now.

Not only are equity markets fragile, the companies that the government wanted to divest - such as SAIL and ONGC - have under-performed for various reasons.

Currently, the government is exploring options such as buying back of shares by cash rich companies and cross-holding (again by PSUs) in various PSUs to achieve a chunk of its disinvestment target.

Aviation: Turbulent times

The aviation sector found itself flying into rough weather this year, what with companies reeling under rising operational and interest costs even as they were unable to raise prices.

With low-cost carriers dominating the sector currently, even full-service carriers shifted focus to low-cost model to maintain market share. But that did not help much. Kingfisher Airlines is a classic example.

The company is currently starved for cash and may have to raise equity to remain afloat. Driven by business turbulence, the company had to ground many of its flights in the past couple of months.

Telecom: tangled signals

Woes have largely been regulatory this year for the telecom sector which saw the end of the ‘tariff war'.

Having lost money in 2G spectrum sales (scam), the Government has asked the existing players with excess spectrum to shell out a one-time fee for the spectrum.

The same would be priced at rates determined for 3G spectrum auction. While this one-time levy would help reduce the government's fiscal deficit, it may take a toll on the future earnings of telecom companies.

Additionally, an eight per cent annual revenue sharing is being proposed for telecom and telecom infrastructure companies.

This move is also expected to shave off a portion of telecom companies' earnings.

The tussle between Department of Telecommunication and telecom players over intra-circle 3G roaming pacts also clouds the sector prospects.

Retailing: Tryst with FDI

FDI in multi-brand retail has been in the offing for a long time now.

After much debate and anticipation, it was finally approved by the Cabinet in the last week of November.

It would have marked the entry of global players such as Walmart, which have been waiting to capture a slice of the huge Indian consumption pie.

The lack of proper supply chain and storage facilities leading to wastage and multiple levels of middlemen bear much of the blame for high food inflation.

Foreign entry was expected to compress supply chains and make them more efficient.

Also, it would have given access to much needed capital flows. However, for now the proposal has been quashed following stiff opposition from both foes and allies of the ruling party, not to mention traders themselves.

Published on December 24, 2011
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