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
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