The Right To Grow
If one were to paint a broad brush picture of what we are seeing in consumer India, everyone is consuming as and when they can, and good deals encourage them to. However, unlike in the recent past, we see a more thoughtful 'should I/do we need to' consumption as compared to the 'why not, may as well' consumption. This rewards some companies with better value propositions than others. In the FMCG sector the market leader had almost flat sales while the second had a 65% quarter on last year's quarter sales growth, with profit going gang busters. In two wheelers, the market leader's revenue increased 27% while the second increased just 14%.
It could appear from this view that a 'do nothing, wait and watch' approach would be quite alright, assuming that around seven per cent GDP growth is what we will achieve, which will gradually accelerate back up to higher levels. However, this cannot be taken for granted because we do have problems looming that could further moderate our already moderated economic behaviour-a high fiscal deficit, soaring inflation, continued government spending, worrying agricultural performance, and an already cautiously spending consumer left alone by cautiously investing companies and cautious banks who seem to believe that abstinence is the best form of prevention.
Some worry that removing subsidies to better balance the budget will depress consumption and hence economic growth and the entire engine may go into economic seizure - pretty much the same argument that is being advanced in support of corporate debt restructuring. The pyrrhic victory of riding the recent storm would be that when the world starts to recover, all our domestic problems catch up with us and we start to feel sick. An export linked India will do better at that time, but is not big and powerful enough to be the engine that powers the rest of the economy.
We need to take a call on what we should do next. There is a strident school yelling that all we have to do is to make money more easily available and much cheaper, so that more companies can expand more and more consumers can borrow more and spend more and all this will get us back to the golden growth rates and rise in per capita income of 2003-08. They also believe that easy money will not go into unproductive uses and create an asset bubble. Another school, which I subscribe to, says that throwing money at the problem won't fix it.
The 'make money cheaper an all will be well' argument assumes that companies and customers have plans and are starved for cash to implement them, or that if money was cheaper and plentiful, it will lead them to make fresh plans. However, this is not about two macro forces talking to each other, but about real people making real decisions, with a logic that needs to be listened to.
Large companies are not starved for cash in order to execute their plans. Nor will they create more plans merely because money is going cheap and thank God for that. Further, they already have access to fairly cheap money overseas, as also options to raise money from sources other than banks, as analysts have been pointing out. Mid-size companies too have learnt to play the 'get money' game well, often to the peril of banks, and also have higher order survival skills. The better ones are the darlings of the private equity business in any case especially the unlisted ones.
The SME sector probably has cause to complain about getting asphyxiated for lack of money, and that sector is far more critical to the health of the Indian economy than the large corporates. However, even if money were cheaper, there is still no guarantee that they would have access to it, because banks don't like them as much as they like large corporates. Credit rating agencies do tell you that there are several SMEs that are credit worthy but not being lent to, though it is unclear who tracks this data. Anecdotally, however, it is obvious that many SMEs do not have robust business models. Their business moves are based on a herd mentality and as long as the tide is rising, they get by and do modestly well. What they need is not cheaper money but more business monitoring and mentoring, and who better than banks to do this? Some of them are winners but some of them are not. As my friend Jayanth Verma of IIM Ahmedabad is fond of saying, many of these are weak and should be allowed to die because it is periodic bush fires that keep the forest healthy. And newer ones are mushrooming all the time in any case. Banks, however, must be forced to follow more progressive risk assessment processes so that they don't throw babies out with the bathwater by being 'lazy' or extra safe.
As for consumers they are telling those who bother to listen that they will not be tempted by cheap money to take more EMI pain at this time, merely because it comes cheap. Makes sense! Data on absorption of housing inventory shows that except for Pune and Bombay where the number is 62% or so, in other cities it is between 30 and 40%. It is also true that today it is cheaper to rent than to buy – the seller is holding out but needs to generate some money on his asset. The speculator on housing and the stock market punter shouldn't have access to cheaper loans in any case, it is aam janata that drives the sort of consumption that motors the economy.
Instead of pushing the economy to perform beyond its capability, perhaps we should take a look at what a realistic growth 'entitlement' should be for an economy such as ours – one which is characterized by a consumer base of lots of modest income people served by a large number of SMEs and micro-suppliers that are collectively far bigger than large corporates. To use an analogy from business, companies are always told that first you have to earn the right to grow by having all the basics in place to grow sustainably, and only then should you grow.
In their case, the right to grow is about having the right set of businesses, the right consumer propositions, a clear source of advantage or competence that makes the case for why they should survive and, of course, great operational efficiency. Bribing consumers and buying consumption growth, and disconnecting investments by companies from consumer demand and connecting them to stock market valuations only ends up winning us the short term battle and losing the long term plot. It may buy today's growth but could well weaken tomorrow's economy.
We need to understand the reality of our consumer economy and work towards strengthening it so that it is a robust growth engine that grows on fundamentals, not on stimulus; and grows not because of unsustainable strategies adopted by suppliers – either by pricing so low that it makes everyone unprofitable, as in the case of the telecom industry today, or by offering credit that will eventually make banks take the hit. You cannot square a circle and extract more demand than the income-affordability realities of a consumer base.
The fact is that the income growth of our consumer base is insufficient to sustain large growth in every product and service category. Consumers have too many things to buy and not enough money. So it is the survival of the fittest category and company. The compelling story even for FDI into India is that even if lacklustre in terms of returns today, it is worth it for companies to come and invest in building robust growth engines for all their business divisions, which will ride the India growth story almost on 'auto pilot'. It is not today that sells the FDI. It is the fact that India is a de-risked 'guaranteed to happen' growth story; it's the second biggest game in the world (after China) and entry tickets are still going cheap. |
