Karnataka

Is the Indian economy in a tailspin? Business sense

Union Finance Minister P. Chidambaram’s recent assertion that India is not in a recession just yet may be formally correct. But it conceals the fact that sections of the economy are well and truly in the dumps.

The definition of a “recession” in most mature economies is a contraction in two successive quarters. However, the linkages developed with the global economies over the last two decades imply that large sections of the Indian economy, espe cially those that have been goaded by an “externally oriented strategy” to focus on exports, are now in a tailspin.

The official count of garment units in and around Bangalore, according to Commissioner for Textiles G.C.R. Subramanian, is that there are close to 400 units, employing about three lakh workers. These are “very tentative” numbers, he says, because he says he hardly “has the staff to find out what may be the exact figures.” For this very same reason he has no idea about how much is exported from Bangalore.Mr. Subramanian, says he is as much in the dark as anyone else because he can only give figures that the industry provides him.

Muhammad Rehan, CEO of Global Clothing Pvt. Ltd, which has a unit in the city, says orders have been “cancelled suddenly.” His company, which reported a turnover of Rs. 80 crore last year — and expected sales to reach Rs. 120 crore this year — expects slower growth this year.

Jagadish Hinduja, Chairman, Gokaldas Images Pvt. Ltd., says the slump in demand in Western markets is driving Indian suppliers into the “interior of the country.” “Only this move will enable apparel exporters compete effectively with producers in countries such as Vietnam and Bangladesh,” he says. “The industry is moving out in a 100-km radius away from Bangalore, to locations such as Maddur and Chikballapur,” he observes.

Banks have been drawing flak for being tight-fisted in these difficult times. Industries are facing severe cash-flow problems because of cancelled or postponed orders. Recently, the State Bank of India (SBI) had “assured” small and medium enterprises (SME) of continued support during the current industrial slowdown. This follows a series of meetings that senior bank officials had with several industries’ bodies in the last few days.

The bank’s interaction with SMEs revealed that most of them “apprehend a considerable slowdown in most sectors.”

According to a senior SBI officer, large-sized corporates, especially in the auto, steel, engineering and iron ore segments “show signs of a slowdown.” Orders have come down considerably and payments have been delayed. The SMEs have reported to the SBI that they expect revenues to come down by about 15 to 20 per cent during the current year. The SMEs feel that it will take at least another 9 to 12 months for things to improve, provided the Government, banks and other organisations understand their problems and extend maximum support, the official said.

S. Narayanaswamy, Deputy General Manager in charge of SMEs at SBI, says these units “are at the mercy of large corporates.” The bank is adopting a liberal approach to credit to such units in the hope that the slowdown is temporary, he said. Industry associations expect softer terms from banks, additional credit and a “long moratorium” during the slowdown.

During the interaction with the SBI officials, they said they also expect higher provisioning for inventories, which are piling up because of delayed or cancelled orders, apart from greater support for meeting their working capital needs. SMEs also want the Government to quickly release pending payments such as Income Tax refunds, apart from extending the time limit for payment of taxes. They also want “prompt payment of subsidies” and a “re-look” at issues such as legislation applicable to labour. They also felt the Reserve Bank of India ought to relax norms pertaining to the classification of Non Performing Assets (NPA), which they said “are currently very stringent.”

The industrial slowdown in the State is likely to affect the Government’s collections through the Value Added Tax (VAT) during the current financial year, according to Federation of Karnataka Chambers of Commerce and Industry (FKCCI) president D. Muralidhar.

Mr. Muralidhar said, “VAT collections are likely to be 10 to 15 per cent lower than levels projected in the last budget presented by Chief Minister, B.S. Yeddyurappa.”

It may be recalled that the plethora of schemes announced in the last State Budget were based on the assumption that VAT collections will be buoyant, growing by more than 20 per cent during the current year. This decline, coupled with the State leadership’s preference for balanced budgets (Karnataka has been running a ‘surplus’ budget for several years), may have adverse consequences for those who are likely to be hardest hit by the ongoing recession. In short, a safety net for those in distress does not appear to be in place for those who may need it the most in these troubled times.

V. SRIDHAR

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