|Last month we wrote, it is time to get over our collective
pessimism, and get on with the job. Companies like Hero Honda who have gone in
for rural markets have outshone others who are still stuck on servicing
consumers who need loans. Auto sector cleared five months inventory in December
and continued to do well in January primarily due to price cuts and discounts.
Telecom continues to add more than 10 million consumers on the network.
In times of slowdown, companies need to cut prices and focus on
areas where the demand is. International demand growth will be lacklustre at
best and likely to be negative. The slowdown will get worse if firms do not
respond ? and that is where the uncertainty in forecasting comes from.
Despite large uncleared inventories, and missing buyers, the
real-estate sector has not really reduced its prices (minor 5 to 10% cuts from
astronomical peaks of the past will not do). At the same time it is reeling
under a severe credit crunch. This crunch is then being transferred in many
different ways to the upstream manufacturing and service sector suppliers.
Merely easing liquidity will have little impact on the real-estate/construction
Yes, it is better to take a hit and move-on rather than make a
profit on every single sale. If prices do not respond to changing conditions,
markets are not working properly, one way or another the government will need
to step in.
If the government responds as most corporate sector economists want
it to ? increase expenditures and reduce interest rates ? sure we may go back
to high growth for a while. But that would be a very short term solution. This
downturn is a signal to (generally large) firms, that all is not well with
their decision-making and growth strategies. Whatever the government does, it
should not distort this critical signal.
The vote-on-account is due on the 16th of Februrary 2009. It is
expected that further tax breaks will be given. If the past is any indication,
these breaks will be very sector specific. Construction, IT sector, automobile,
chemicals, textiles, financial, etc. These sector specific stimuli have to be
thrown in the trash can. If tax breaks have to be given, give it to everyone.
Reduce service tax for everyone, reduce income tax, reduce VAT. But do not give
sector specific advantages as they are highly distortionary.
Yet the news is not all bad. The ABN-AMRO PMI survey (which we find
a better indicator than the government?s own IIP index) has shown a small
rebound in prodution worldwide in January. More interestingly, Indian
manufacturing has been the least hit out of all countries surveyed.
For the year ahead, the RBI survey of professional forecasters
shows a wide range ? minimum of 3.9% and a maximum of 8%. While our forecasts
are more in the 7% growth zone for the year ahead, the 4% forecast is very much
in the domain of the possible. A drought, or sudden shocks from the western
financial world, or bad news from India?s own unorganized sector could take it