The State of Business 2013

The state of business

An endless struggle for power, paucity of skilled labour and poor infrastructure is taking a heavy toll on industry

It is quite astonishing how the environment for business can change so dramatically in barely two years. When the Outlook Business team reported from eight industrial clusters across India in 2011, the mood was visibly shifting from business despondency to optimism. Entrepreneurs spoke passionately of investing more money on expansion plans and said business was clearly on the growth path. By last year, we could see some signs that all was not well, as issues such as shortage of power and escalating costs, especially labour, threatened to play party pooper. This year, all those worries have become a grim reality — across India, businessmen and entrepreneurs have a long list of cribs and complaints and distressingly few ways of tackling them. 

Perhaps it’s not surprising. After all, India’s own growth story doesn’t make for very happy reading just now, with an estimated 5% growth rate for the current financial year. Still, our team decided to check out the ground reality. This entailed travel to eight business clusters spread across the country’s four zones — Nashik, Halol, Pantnagar, Bhiwadi, Ludhiana, Salt Lake City, Hosur and Ambur. The primary objective was to get a diverse set of views from business owners, workers, small suppliers, executives at trade chambers and associations, among others. What wasn’t openly spoken about or shared was equally important — observations such as businessmen having too much time on their hands, workers sitting idle at mid-day or the unrelenting hum of a diesel generator are telling signs of the state of business.

The bottomline (which, by the way, is also under pressure) is that the environment is anything but rosy and a stark contrast to what we encountered in 2011 and worse than what we saw in 2012. Ironically, people seem to be more hopeful this time and that hope is pinned on a “feeling” that the bad times can’t continue for too long.  A survey of 88 respondents from the eight industrial clusters we visited show that 65% of the companies saw sales either decline this fiscal or barely managed to hold up. 44% of them are operating at a capacity utilisation lower than that of last fiscal. The outlook for FY14 is cloudy considering that exactly half of them said they expect sales to be better next year while the other half seemed unsure.  

Monstrous costs

Over the last year, costs — both labour and raw materials — have increased by as much as 30% depending on the industry one operates in. But passing on costs to the end-user, while seemingly logical, isn’t possible in many cases. This means the increase in the selling price does not match the increase in the cost of inputs and consequently, net margins have taken a hit. So, although most respondents across the eight business clusters said turnover for FY13 will remain stable or even increase as compared to the previous fiscal, dig a little deeper and you realise it’s nothing to cheer about. The surge in costs has ensured that an increase in topline doesn’t mean much.

Take the instance of Pantnagar in Uttarakhand, which is today a significant base for industries such as automobiles, auto components and plywood. All the respondents across sectors said raw material costs have increased during the fiscal, while all barring one said labour costs, too, have moved upwards. Indeed, shortage of labour is a common cry across clusters — where in some, the distance from major cities is a cause of attrition, in others the culprit is NREGA, which has had a devastating impact on migration of labour from poorer regions. That concern had already found voice in Ludhiana two years ago and businessmen were complaining about missed market opportunities. Today, just 10% of the respondents in Ludhiana said business was good. In fact, half of them said capacity utilisation was nowhere close to that of the last fiscal. So, across clusters, even if many respondents said they were going ahead with their capex plans for FY14, it was, by their own admission, being done in the hope that things will look up in the immediate future.

If there is one story that has got uglier in the last year, that relates to the scarcity of power. The worst affected in this category are the smaller entrepreneurs who work on wafer-thin margins with very little ability to bear the cost of back-up generators. In Nashik over the past few months, at least, power cuts have been restricted to Saturdays, which allows the business community to get the best from the rest of the week. There’s uninterrupted power in Gujarat, so the problem doesn’t figure on the radar of entrepreneurs at Halol. No such luck in Tamil Nadu where load shedding is to the tune of at least 12 hours every day and spends on diesel and diesel gensets are spiralling out of control. Most businessmen interviewed there candidly declared that this is perhaps their toughest time in business. 

What lies ahead

In spite of all their woes, most businessmen in India — at least in these eight clusters — are an optimistic lot. Although they’re realistic enough to recognise that factors such as inflation, power shortage and road connectivity — their biggest sources of grief, currently — are beyond their control, they remain hopeful about an improved environment and higher profitability and are unrelenting in their business pursuit. Some businessmen do have reason to be happy. For instance, in a centre like Nashik, where demand for residential and commercial property continues unabated, builders and developers remain quite kicked about the future. Similarly, Salt Lake City in Kolkata, which is host to a multitude of players in the IT industry, has little domestic problems to contend with but is anxious about growth in the export markets.

Cut to manufacturing, may it be someone who manufactures industrial springs, packaging material or just folks in conventional engineering businesses. The story here is often about demand slowing down and orders being spoken of or even committed in word but never executed. The result: cash flows have been seriously affected with credit cycles getting stretched. If money was paid up in a month in the past, it is not unusual for businessmen now to chase payments for three or even four months. Where delayed payments were still an exception two years ago, they are now the norm.

The irony is that cost-control was a buzzword two years ago and today, the term has little meaning. In the past, cost-control was exercised by making better use of existing resources, while there remains very little scope to do anything like that today. The focus therefore is on doing whatever you can to safeguard your business. That comes with its own set of challenges. For instance, a number of small enterprises in the industrial segments have undercut prices to the extent that it no longer makes sense for them to even remain in business. That’s taking a toll on their financial health and the incidence of defaults is only rising. Not too many are complaining about credit availability though – that’s because there isn’t enough appetite for expansion. But if this 12-month period has been strenuous, businessmen concede that it is also one that has been the most educative. 

It is clear that the mood is downcast and one has to contend with the fact that significant policy changes will not take place in a hurry. Issues like inflation, power, tougher credit cycles, high interest costs and labour shortage are realities that need to be managed. By the looks of it, the slowdown has severely affected business across clusters. However, if you go by the collective wisdom of our 88 respondents, the glass is still half-full.