State Of The Economy 2014

Hopeful of a turnaround

Companies aren’t sure about going ahead with capex plans or making new hires as they grapple with declining sales

There is continuous demand from our clients. Growing the business is not a serious concern,” says Sanjay Marathe, founder of Chemcrux Enterprises. He’s clearly confident about the way forward for his ₹20-crore pharma company based in Ankleshwar, Gujarat. Trouble is, voices like these are in a minority these days. This year, as it has for the past four years, the Outlook Business team visited industrial clusters across the country to gauge the state of the economy and capture the mood of India’s businessmen. The collective sentiment this time: muted. There are instances of businesses in recession-proof industries making ambitious plans for the future but, by and large, most companies aren’t sure about going ahead with capex plans or making new hires as they grapple with declining sales.

Over the past month, our team travelled to eight business clusters — Bharuch in Gujarat, Bhilwara in Rajasthan, Mancheswar in Odisha, Gulbarga in Karnataka, Pithampur in Madhya Pradesh, Jalandhar in Punjab, Pimpri-Chinchwad in Maharashtra and Urla in Chhattisgarh. We spoke with a diverse group of people, from shopfloor workers and small entrepreneurs to industry association heads and government officials, understanding what progress has been made, what remains to be done and what the outlook is for the future.

A survey of 79 respondents from the clusters we visited has some depressing numbers. Over half said the economic environment for their businesses is bad. Sales were lower than FY13 or flat in 70% of the companies surveyed and 48% said capacity utilisation in FY14 was lower than the previous year. The businessmen interviewed were almost unanimous in saying raw material and labour costs have increased.

You can’t blame them for this mood of doom and gloom. While obituaries for Indian manufacturing have been written for some time, truthfully, things have never been so bad. Manufacturing’s share in GDP has dropped to 15.1%, the lowest in the past decade. Industrial output in April-December FY14 has shrunk by 0.1%, compared with y-o-y growth of 0.7% and the manufacturing sector’s output contracted 0.6% compared with growth of the same size in April-December FY13.

The more things change...

If that’s the big picture, close up, the litany of woes hasn’t changed much in the past few years. Many of the issues we spoke of last year are still relevant and affecting businesses across the country. The lack of power and water, poor connectivity — awful roads in Jalandhar and Urla, no direct connection to Mumbai at Pithampur — an acute shortage of skilled labour, the MGNREGA luring away migrant workers, rising raw material costs, shrinking margins... you’ve read it before, but that doesn’t make it less real. If there is one reason laments on power were not as strident this year, it is because companies are anyway working at lower capacities because of slack demand. The pain was felt in debtor days, which increased for most companies, and while cost of credit (for those eligible) and inventory cycles showed no signs of improvement or, at best, remained stable.

There are several new concerns as well, this year. As land prices skyrocket, many clusters are saturated, so expansion — for those considering it — is a challenge. The Pollution Control Boards are more vigilant, refusing to give permission for new units in industries known to be polluting. That means no new chemical businesses at Ankleshwar and no textile processing at Bhilwara, while crusher factories at Gulbarga have shut down. High taxes have been an issue at some clusters, which is why Pithampur lacks auto component vendors, businesses in Bhilwara crib about the cess on texturised yarn and industrialists at Mancheswar say lower VAT in neighbouring West Bengal gives the latter an advantage.

Will the tide turn?

The downturn in the economy has taken a toll on core sectors such as cement, as well as allied industries. The impact is visible at Gulbarga, a natural destination for cement companies given its extensive limestone reserves. Even as land prices skyrocket due to the pro- posed entry of new companies such as Lafarge and India Cements, existing players, meanwhile, are feeling the pinch of oversupply, with some operating at just 60% capacity.

Pithampur, meanwhile, is reeling under the shock of the worst year in a decade — companies such as Volvo Eicher and Case Construction pulling back on production. Sure, the Delhi-Mumbai Industrial Corridor is expected to act as a shot in the arm for the region, but that’s still some time away. Meanwhile, companies grapple with shrinking numbers.

Where some clusters complain of government interference in terms of environmental clearances and excessive taxes, Mancheswar is suffering from neglected child syndrome. Every businessman in this small industrial area of Bhubaneswar is openly bitter about government inattention, the grouse being that growth in the area could skyrocket if it were formally made into a cluster. At Urla, too, while the Chhattisgarh government comes in for praise for finally paying attention to the area’s pathetic roads, businessmen point to several gaps in the cluster’s infrastructure that if corrected could turn around its fortunes.

Some areas, though, are managing just fine. Bharuch not only has great infrastructure that is luring companies here from outside, it has also been buffered from the worst of the downturn thanks to the predominance of recession-proof pharma companies. Bhilwara’s synthetic fabric companies are reinventing themselves to stay relevant in a cotton and denim preferring world, even as waning Chinese interest in spinning means a resurgence for the traditional polyester mills. At Mancheswar, companies are getting into informal arrangements that mimic the working of clusters to drive efficiencies and economies of scale. The mood in these areas is much more positive than at other clusters. But even otherwise, optimism seems unfettered across the board. About 59% of the respondents were certain FY15 will be a better year and another 53% say they will be able to maintain their profitability. Perhaps it is their conviction that after two years of lull, the economy’s self-correcting mechanism will swing into action. Perhaps it’s belief that a new government at the Centrewill make all the difference. Perhaps it’s the hope and prayer that things won’t get any worse.