When the newspaper headlines screamed `516,000 jobs lost in the USA in October' or `The second biggest bank in the US goes bankrupt', most Indians remained unperturbed as these are happening in a developed economy thousands of kilometers away. Some even rejoice that Americans are paying for their irrational exuberance. As Indian economy is expected to have a fairly decent growth of about 7 per cent, most of us are oblivion to the looming threat of an economic recession and job losses.
What started in the US about 18 months ago as a housing mortgage crisis has slowly engulfed the whole world, including India. Economists in the developed countries now do not dispute if the world is into a recession. They debate if this down turn will be as bad as the Great Depression of 1930. The enormity of the problem can be gauged from the fact that the US government has announced a $700 billion bail out plan for the economy, the Chinese government plans to spend $ 586 billion to stimulate domestic demand and the governments of several smaller countries too have earmarked billions of dollars to rescue their economies.
Heading for a slowdown
The impact of global turmoil has certainly reached the Indian shore as there are clear indications that our economy is struggling. (Deccan Herald first wrote about the possible slowdown in April, 2008). Here are a few clear pointers: hundreds of workers have lost jobs in diamond jewellery, textiles and leather industry. Companies in information technology industry have stopped hiring and projected lower manpower need. Growth rate in industrial production has dropped. A large number of capital intensive industries have partially stopped working. Firms attached to the capital market are laying off people and large companies are putting their future expansion plans on hold . "The decline in growth rate of all these key economic indicators definitely reflect onset of slowdown in the economy" noted economist Pai Panandiker, Chief of RPG Research Foundation told Deccan Herald.
Demolishing the decoupling theory, the crisis in India began with the stock market crash that started early 2008. As the subprime or the mortgage crisis in the US snowballed to become a financial disaster, most large financial institutions there reported huge losses. Some became bankrupt, a few got taken over and others are surviving on government's bailout package.
Faced with fund crunch, foreign institutional investors (FII) has been selling their holdings in the Indian stocks since January - they have sold stocks worth $14 billion (Rs 70,000 crore) in 2008, crashing the BSE Sensex from 21,186 to below 10,000 now. As investors lost hundreds of crores, new share issues have completely stopped, drying up a major source of fund for the corporate sector. During April-August 2008, for example, new issues raised only Rs 2661 crore from Indian capital market, against Rs 26,957 crore raised in same months last year.
Liquidity crisis
Funds dried up from the banks too. Starting from early 2008 till the middle of the year, the Government of India followed a very tight monetary policy mainly to control inflation fuelled by galloping oil prices that touched $147 a barrel. Using repeated hikes in cash reserve ratio and increase in interest rates, the central bank mopped up huge amount of cash from the system, forcing banks to close the tap on credit. The ill effect is now clearly visible as the industrial growth in the country has suddenly lost momentum. Latest data on industrial production shows that the growth rate was down to 4.8 per cent in September 2008 against 7 per cent in same month last year. Earlier, in August industrial production had inched up by only 1.3 per cent.
Anatomy of an economic slowdown in India
The cause...
- US mortgage crisis led to global financial disaster
- Poor Liquidity and high interest harmed industries
- High prices of Oil
- As foreign investors pulled out, stock markets crashed
- People lost heavily in stocks and mutual funds
- IPOs have dried up
- Corporate profits down in September quarter
- Excise, customs collection down
- Index of industrial production slackening
- Exports are down
- Realty industry in the dumps
- Car, bike & truck sales down
- Truck makers impose partial shutdown
- Steel plants to cut production
- Nasscom predicts lower employment in IT sector
- New IT jobs have come to a standstill
- Job losses in sponge iron, ore mines and in cement
- 50,000 lost job in diamond & jewellery industry
- Seven lakh textile workers were fired
- Hospitality and airlines are hit by poor demand
- Stock broking houses are laying-off people
- Consumers spend less and save more
- The future is extremely uncertain
- More job losses if downturn prolongs
- India Inc goes slow on new asset creation
By Sumit Kumar, Section Indian Economy
Posted on Mon Nov 17, 2008 at 02:47:27 AM EST
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Weakening export demand is another reason," explained FICCI Secretary General Dr Amit Mitra. To ease the credit flow to trade and industry, the government in the last one month has freed up large sums of money, but the risk-wary banks are yet to open their purse strings.
The downturn
Among many indications of a slowdown in the economy, the government's lower tax collection figures give a macro view. In October this year, for the first time in many years, the excise collection dropped 8.7 per cent against the same month last year. The revenue department officials pointed out that the fall was mainly due to drop in manufacturing activity. The slowdown have spread to the service sector too as the service tax collection in October this year grew 18 per cent against 40 per cent rise in October last year. The exports of Indian goods and services have also contracted 15 per cent in the month of October as consumers in the developed countries are spending less.
Falling sales
It is true that Indian economy is mainly driven by its domestic market -- which accounts for 85 per cent of country's gross domestic products (GDP), while dependence on exports is only 15 per cent. But the fabled Indian middle class, estimated at 30 crore, are not spending now as much they used to. The fear psychosis of `Bad days ahead' has made middle class consumers, the belly of the market, a bit guarded in their spending resulting in slack demand for cars, bikes, electronic items, home appliances, clothes. People are also traveling less and seldom eating out. No wonder all airlines are flying their planes half empty and hotels are giving away rooms at huge discounts. Sale of car in October at 126,098 was 9 per cent lower than last year and sales of two wheeler dropped 15 per cent.
Worst, sales of commercial vehicles, an important component in transportation, dropped a whopping 36 per cent in October. Stung by the slack sales, Ratan Tata, chairman of the Tata group that owns the largest automobile company in the country Tata Motors, advised his group CEOs to improve operational efficiencies, restructure internal cost, drastically reduce operating expenditure and defer from capital expenditure unless considered strategically critical. Tata Motors has also effected partial shut downs in its plant in various parts of the country. Another auto major Ashok Leyland recently stopped its plants for a few days to bring down unsold stocks.
Even the intermediate industries like steel, chemicals, cement are now faced with lower demand. Major steel makers like Tata Steel, SAIL, Jindal Vijaynagar Steel, etc, have announced significant production cut in long products and in HR coils which are used by many industries. As the real estate companies have more or less frozen new projects, their demand for rods and bars have dwindled. Of course, dropping global demand for steel has led to lower exports.
Job losses
The scene is no better in petrochemical industry which produces a large number of chemicals that find usage in downstream industries. Faced with a lower demand and crashing prices, country's largest petrochemical company Reliance Industries Ltd has shut down its plastic raw material plants at Patalganga, Maharashtra. With half empty flights, players in the domestic airlines industry are bleeding so much that together they are expected to pile up Rs 10,000 crore loss in 2008-09. Unlike in the developed countries where every job loss gets registered with the unemployment office, in India we do not have any authentic centralised data to monitor job loss. It is generally known that hit by a fall in demand from the US and Europe, our software services companies are cutting jobs.
Many multinational companies having captive operations here for IT and BPO are also firing people. A large chunk of British Telecom's 10,000 job cuts, for example, will come from India. When Lehman Brothers collapsed its entire support service team of about 2300 people in Mumbai became surplus. The IT industry body Nasscom has predicted that the IT industry in India will hire 2 lakh new people in 2008-09 against 2.80 lakh last year. The top ten IT companies, however, will continues to expand but at a much lower rate.
No real savior
When Jet Airways terminated 1900 employees to cut cost, it was forced to take all of them back under political pressure and due to media glare. But thousands of workers in the unorganized sectors are not so lucky. Now there are reports that hundreds of small industrial units have removed lakhs of workers from the job as the market for their products have either vanished or dwindled. About 50,000 workers in the jems and jewellery industry, for example, believed to have lost job as a fallout of the global economic meltdown. Gems and Jewellery Export Promotion Council Chairman Vasant Mehta recently said "Over 3-4 per cent people in the sector, which employs over 1.3 million, have lost their jobs due to recession in the US and Europe, the two big high-end markets for Indian exporters,"
The job loss will rise if the global recession continues, he said. After logging in a healthy 18 per cent growth in the first half of the current fiscal, exports of gems and jewelleries declined in October as reduction in US consumer spending (it accounts for 35 per cent of exports) started impacting the global suppliers.
Long term impact
The situation in the textile industry is even worse. Plagued by loss of export orders, rising cotton prices, massive power shortage and liquidity crunch textiles and garment manufacturers together have closed 700,000 jobs in the last six months. If the situation does not improve quickly, the job loss will rise to 12 lakh, said R K Dalmia, Chairman of Confederation of Indian Textile Industry. Similarly, hundreds of carpet makers from the northern states are now unemployed as export orders from US and Europe have come to trickle. Retrenchments have become the order of the day in industries like mini steel plants, sponge iron, mining of ore, leather, chemicals, etc. Worst, there is no sign of any revival, not as yet.
The government's measures to ease money supply have not made much of an impact. The India Inc is also is going slow on investment for future projects. A recent study by Credit Suisse a clutch of 34 projects with an investment of about $190 billion faced 19-month delay on an average resulting in 30 per cent cost overrun. The curb on asset creation will directly impact job creation in the future.
Recently a HR consulting firm pointed out that new job generation in the organised sector is expected to fall short of predictions by 30 percent this year following the global meltdown. "As per our survey of 1,000 companies in 22 sectors early this year, around one million new jobs were expected to be created in 2008. But after the global meltdown coupled and domestic issues like high inflation, it will be 30 percent lower than expectations," said K. Pandia Rajan, managing director of recruitment firm Ma Foi Group.
If we are to come out of the approaching recession, the vicious cycle of job loss, lower demand, lower production and more job loss, needs to be broken urgently. The government needs to inject huge funds in developmental projects quickly. This will enlarge demand many times through the multiplier effect and in turn will help industry creat new jobs. The agricultural production must be boosted to create more demand from the rural economy.
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