India was the exception to the global rule, the government firmly assured its citizens. So when the global financial crisis rudely interrupted that complacency, courtesy a severe liquidity crunch that sucked cash out of the money markets, nobody was prepared to cope with the misery that followed. Real estate and exports were the worst hit but others, too, were about to enter a prolonged slump, with not even a glimmer of light visible at the end of the tunnel. Taking a cue from governments and central banks around the world, the finance ministry and the Reserve Bank of India then embarked on a series of stimulus measures to help ease the worst effects of the crisis. Interest rates were slashed, taxes were cut, measures that are having an effect on some areas of the economy. This primer, which is full of arrows pointing down, shows what happened across some of the key sectors.
Dragged down by slump
The economic downturn has put the brakes on the Indian advertising industry with the pace of growth in advertising expenditure having slowed in 2008, after five years of rapid growth rates averaging 17-18% per year. After expanding 21% in 2006-07, advertising expenditure slowed to a growth pace of 16% in the next year and further to 10% in 2008-09. Of the total Rs22,288 crore advertising expenditure in 2008, print and TV constituted 88% of the pie, but the growth rates for the two media verticals fell significantly from 15% in 2007-08 to 7% in 2008-09 for TV, and from 14% to 12% for print in the same period, noted a study by media buying and planning agency Lintas Media Group, part of the Interpublic Group. The Internet was the fastest growing medium at 56%.
What’s worse is that 2009 looks even more bleak for the advertising industry, which has faced its first bout of negative growth in the first half of this year. According to a media spends projection report by Madison Communications Pvt. Ltd in association with trade publication “Pitch”, the advertising expenditure for the first half of 2009 was Rs7,452 crore, which is Rs1,414 crore less than advertising expenditure for the same period last year. Industry professionals believe even advertising expenditure achieved this year have been all thanks to the two mega events, the Indian Premier League and the general election that bumped up spending, which could have otherwise been even worse, leaving the industry grappling with a crisis. By the year end, the overall advertising expenditure is not likely to cross Rs20,000 crore, marking the end of what has been a dream run for the advertising industry.
Losing faith in the economy
As industrial output slumped, exports tumbled and companies scaled back investments, business confidence took a turn for the worse. The National Council of Applied Economic Research Business Confidence Index has continued to decline since April 2008 when it stood at 148.7. A year later it had fallen to 81.6. With the late revival in the monsoon, companies that depend on rural markets may regain their faith in the economy.
Slowing down, speeding up
Tightfisted creditors and expensive loans resulted in a fall in car sales that began in July and continued until January. (September was an exception as manufacturers increased dispatches in anticipation of festive season demand.) But after ending the fiscal year with flat growth, car sales have surged, with buyers crowding into car dealerships as new models such as Maruti Suzuki’s Ritz and Honda’s Jazz entered the market. Car makers have posted 25% growth last month, albeit on a low base.
Second most optimistic lot
India ranked third, behind Indonesia and Denmark, in the Nielsen Global Consumer Confidence Index for the first half of 2009, still 15 points down from the second half of 2008. Around 56% of Indian consumers surveyed said the slowdown would end in the next 12 months, the second most optimistic lot after the Vietnamese with 66%. Concern about pay cheques seemed to have abated. Around 13% said job prospects in the next one year would be “excellent,” while 55% thought they would be “good.”
Credit growth has fallen in recent months, as companies are reluctant to take loans fearing reduced demand. Banks, not very eager to disburse funds in the last quarter of calendar year 2008, have loosened their purse strings, but are still cautious with exporters, real estate and those without good credit ratings. Credit growth was 14.1% for the week ended 28 August, which bankers attribute not only to low demand, but also to the high base effect of last year at around 25.3%. It was as high as 32% in 2006-07.
Taking the worst hit
India’s exports sector was the worst hit by the downturn with global demand contracting for the first time in five years. Merchandise exports have been contracting for 11 months in a row since October last year. In August, exports contracted 19.7% to $14.3 billion. During the first six months of the current fiscal year, overseas shipments contracted 31.3% to $63.9 billion from $93.1 billion during the same period last year. Labour-intensive sectors such as leather, textiles, gems and jewellery were the worst hit.
Scrapping public offers
At least 60 Indian companies deferred their share sale plans after filing offer documents with the market regulator in 2008. There were only 12 initial public offers (IPOs) in the year following the Lehman bankruptcy that raised Rs9,886 crore. This was a 64% decline from the Rs27,487 crore mopped up in the previous year. But with secondary markets growing almost 100% in the past six months on hopes of continued economic growth, risk appetite has returned to the market and the outlook for IPOs seems brighter.
Caught in the doldrums
India’s software exports, after surging at least 30% in the last six years, grew the slowest last year as clients in the US and Europe cut spending on technology. The Indian IT industry faced a jolt during the year after Ramalinga Raju, founder of Satyam Computer Services Ltd, confessed to a fraud by fudging books of what was then India’s fourth largest software exporter. The government intervened to save Satyam, which was eventually bought by Tech Mahindra Ltd. Indian software firms expect a recovery in 2010.
Poor performers punished
Companies across sectors such as technology, manufacturing, airlines and hospitality went slow on hiring as the economic crisis unfolded. From chasing talent, companies resorted to mostly replacement and need-based hiring. Manufacturing firms such as Toyota Kirloskar Motor Ltd shrunk their contract workers’ pool as they cut shifts at their factories, in line with demand. Employers resorted to tighter performance metrics, weeding out those perceived to be at the bottom of the table. But things seem to be looking up. According to the Manpower Employment Outlook Survey India released last week, Indian employers expect a robust labour market in the three months ending December 2009. Around 36% of employers anticipate an increase in head count, 56% predict status quo and a mere 2% expect a dip. The survey had a sample of 5,637 Indian employers.
Buyers beat it, shops shut
Organized retail was one of the casualties of the slowdown. Several retailers including Pantaloon Retail (India) Ltd, Spencer’s Retail Ltd and Aditya Birla Retail Ltd scaled down expansion plans and shut shops. The stand out failure was Subhiksha Trading Services Ltd, which shut 1,600 outlets nationwide since January amid a cash crunch. The company is in talks with lenders to restart operations. Recent Mint research shows retailers closed at least 2,000 branded stores in the last year or so.
Realty goes downmarket
Around a year after Unitech Ltd, India’s second largest developer, announced its luxury Unitech Grande project (apartments for over Rs1 crore), the slowdown slammed the real estate sector. Sales of high-end homes plunged from September 2008. Developers started borrowing heavily and the debt of those such as Unitech surged almost Rs10,500 crore at the end of 2008. Survival has meant going downmarket, with smaller, lower-specification affordable homes under Rs30 lakh, demand for which is high.
Deals drop, values decline
Mergers and acquisitions (M&A) activity slumped after September 2008. Venture Intelligence said the number of deals fell by 47% and their value by 56% in the last 12 months from a year earlier. The sector with the highest M&A activity in the past 12 months was the IT-ITeS space , followed by manufacturing. The top three completed deals were the acquisition of Imperial Energy Corp. Plc by ONGC for $1,900 million, the purchase of Axon Group Plc by HCL Technologies Ltd for $682 million and the purchase of Shantha Biotechnics Ltd by Sanofi-Aventis SA for $625 million.
Minor impact, growth slows
While the subprime crisis demolished the home loan market in developed countries, it only had a minor impact in India. Growth of home loans slowed to 17.45% in the last quarter of the previous fiscal year, according to data from Housing Development Finance Corp. Ltd, the oldest mortgage lender in the country. These are just numbers for the company, as consolidated data for the whole market is unavailable. The expansion rate of home loans has since recovered and home loans grew at 20.6% in the first quarter of this year. Given the huge pent-up demand for housing , the subsidies on interest rates and correction in property prices, the outlook is positive for this sector. Meanwhile, real estate companies have reduced rates (and unit sizes) to meet demand at lower price points.
Pay cheques frozen, a few cut
Salaries were a mixed bag in the post-slump period with a large number of companies doling out pay rises while others froze salaries. Around 27% of firms said they froze salaries enterprise-wide at 2008 levels, 38% of companies hiked salaries in 2009 as per plan and a mere 6% trimmed pay cheques in October 2008-April 2009, according to a Mercer-CII survey. Things look better for the June to December period, with at least 41% of companies saying they would raise pay across their enterprises as per plan, 15% foresee the deferral of pay rise, 6% a dip in salary levels and 15% plan a freeze, with the remaining not responding to the question. Mahindra Satyam, the new brand identity of Satyam Computer Services Ltd following its acquisition by Tech Mahindra Ltd, has meanwhile reinstated the variable portion of pay for all employees after having suspended it in April.
VENTURE CAPITAL/PRIVATE EQUITY ACTIVITY
Deals take a plunge
Venture capital and private equity investments have plunged in the last eight months in the country. The total number of VC deals from January to August stood at 38, with investments worth $167 million, compared with 108 deals worth $617 million in the same period a year ago. Private equity players struck 126 deals, worth $1.9 billion in the first eight months of this year, against 326 deals last year worth $8.68 billion. Microfinance institutions (MFIs) stood out in terms of gaining investments this year. So far this year, investors have put $68 million into MFIs, compared with around $2.3 million last year.