Over time, I have observed a trend across all major industry associations and chambers of commerce. They compete to say things that the government wants to hear. Nobody seriously criticises any policy or procedure, however politely it may be couched. None wants to be the harbinger of bad tidings. Each want to outdo the others in singing hosannas of ministers, ministries and the prospects of everlasting rapid growth.

Soon, associations and chambers get beholden to the ministers. The balance of power —delicately poised in the best of times — decisively shifts in favour of the politicians and the government. When that happens, it becomes self-fulfilling. Ministers need to be propitiated. And the more revered they are, the less they can be criticised.

It works in good times. When the economy is growing at over 9 per cent with inflation under control, a competitive exchange rate and a fairly benign interest rate regime — as we had for almost three of the last four years — mutual admiration societies give comfort to all. Things start falling apart when the ride gets bumpy. After years of incessant adoration, few ministers can tolerate even gentle and constructive criticism; and few, if any, in industry want to be the first to bell the cat. So, when things start going downhill, chambers of commerce and industry associations remain ostrich-like for longer than most. Nobody wants to be the bearer of bad news.

Well, it is bad news time. Say what you will, but manufacturing growth is slowing down quite rapidly. Moving averages exhibit trends better than point estimates. The graph plots the growth of the index of manufacturing, with the blue line being the year-on-year growth based on point estimates, while the red line gives the annual growth of the three-month moving average.

In January 2007, manufacturing growth based on the three-month moving average was 14.6%. By October 2007, it was at 10.6% — down 400 basis points from January. Few, if any, had rung the warning bell. Ashok Desai, a columnist in this magazine, was an exception. In April 2008, growth was down to 6.5 per cent.

Several sectors have been getting hammered. In August 2006, spurred by cheap credit, consumer durables growth (three-month moving average) was 18.4%. By September 2007, it had de-grown to -5.5 per cent. There has been a mild uptick since then. Even so, growth in April 2008 was a mere 2 per cent. Growth in consumer non-durables has fallen from a peak of 17.1% in May 2007 to 7.6 per cent in April 2008. Intermediate goods output growth has dropped from 14.7 per cent in January 2007 to 5.4 per cent in April 2008. Even that sturdy growth engine — capital goods — has fallen: from 24 per cent growth in October 2007 to 11.7 per cent in April 2008.

Manufacturers are hurting. Input costs have gone through the roof, especially steel, copper and aluminium. While there are metal cost pass through clauses in most contracts, I have seen manufacturers facing great difficulty in making their buyers agree to appropriate price hikes. The lag is usually six months; sometimes more. Few customers agree to giving higher prices for energy costs. Try running an energy intensive business where furnace oil prices have risen by 73 per cent between April 2007 and June 2008 without pass through, and you’ll know what I mean.

That’s not all. Global demand growth is down; so too is Indian demand growth. We are also sure to see another sharp interest rate hike as RBI tries its bit to rein inflation. I won’t be surprised if manufacturing growth comes down to the 4.5-5 per cent mark for most of 2008-09. This sharp compression will take time to unwind. So, be prepared for lower growth, lower profit margins, and major stress on cash flow management. And ask your chambers to lift their heads from the sand. When the horizon is dark and swirling, you can’t pass it off as an evening breeze.
 
Published: Business Standard, June 2008