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State Of The Economy 2017

Getting On With Work
A summary of how demonetisation and inputs such as raw material, labour and credit costs have impacted businesses across 11 industrial clusters

Krishna Gopalan

For a good part of FY17, it was business as usual. While there were niggling problems like creaking infrastructure, quality of labour and rising cost of raw materials to contend with, the road ahead till March exhibited no symptoms of being unremarkably different. All that changed in early November as businesses across the country were caught unawares. 

The Prime Minister’s decision to demonetise the 500 and 1,000 notes, ostensibly to reduce the soaring level of black money, left many a business in complete disarray. Though things are getting back to normal, it hit many enterprises hard. By any yardstick, it is demonetisation that is the overarching theme across enterprises. The issue has affected them in varying proportion depending on a host of factors such as how much cash they handled, their dependence on the domestic market, and the uncertainty on how quickly their debtors will pay them. Equally, there are businesses like four-wheelers and cement in some pockets that have remained unscathed by the phasing out of existing currency.

This year, too, Outlook Business’ team of reporters travelled to eleven industrial clusters — Baddi, Ludhiana, Guwahati (the first time the north-east has been covered since this special edition got underway in 2009), Raipur, Coimbatore, Erode, Kochi, Gulbarga, Chakan, Ankleshwar and Ahmedabad to file an on-the-ground report of how businesses have fared in FY17 and to gauge their expectation for FY18.

Problems on hand
To set the record straight, the period between April and October was marked by steady and often impressive growth, while that starting with demonetisation in November altered the trend. In that sense, the story is split into two unequal halves. Of the 103 respondents from these clusters, a whopping 30% said business was bad and only 20% were happy, with the rest maintaining it was barely stable. The rub has been with the high proportion of respondents (39%) whose sales were less than last year’s, resulting in declining overall capacity utilisation.

Take the case of the bicycle industry in Ludhiana, one of the city’s cash cows. Manufacturers lament about demand from small cities and rural markets dropping by 85%. With Punjab accounting for 75% of India’s bicycle production, this is a phase that the folks there would like to forget. A similar trend played out in Chakan, a huge market for auto components. Many a small manufacturer depends on the two-wheeler majors based there. The issue in Chakan is that 60% of two-wheeler buyers pay in cash and thus anyone with high dependence on motorcycles has faced the music.

The cash crunch had many dimensions. Money going out of circulation, apart from having a direct impact on business, delays payments. Only 7% of the respondents said their debtor days had improved — in Baddi for some vendors, it has almost doubled from 50 days to 90 days. The sight of farmers in Gulbarga waiting to collect their payments at a time when the production of toor dal has hit a record high made for a strange paradox.  

The demand for better infrastructure continues unabated and this year was no exception. A centre like Ludhiana remains troubled by a lack of access to an airport, while its textile and garment counterpart down south, Coimbatore has had no flyovers coming up for 25 years. Given that Coimbatore is the second largest IT and BPO hub in Tamil Nadu after Chennai, this has the makings of an opportunity tragically lost.  

The threat from China remains and that is evident in a cluster like Ankleshwar, which is hugely dependent on chemicals. With pollution norms here getting tougher by the day, there is hope that this story will change for the better. This is at a time when companies back in China are also being watched very closely. The dragon nation’s impact on the  global steel industry is now a case study and even in distant Raipur, where almost 25% of the steel units have applied for closure. The issue on hand for Guwahati’s tea business, one that is synonymous with the region, is about unrelated twin problems — shortage of workers and climate change causing uneven distribution of rainfall.   

Room for cheer
The silver lining has been the availability of power, an issue that quite literally kept businesses in the dark three years ago. At that point, our reporters struggled to have a conversation with respondents, who said the paucity of power was on top of their list of worries. That has made way for a comforting 80%, saying power cuts have ceased to make a difference. Ironically, this statement of affirmation comes from states like Tamil Nadu and Karnataka, where the generator’s din, in the past, kept our reporters company. 

The positive outcome from this has been a lower cost burden apart from time to focus on more important things. Our survey showed a high proportion (75%) of businessmen facing no issues when it came to getting loans from banks. Then, 43% of them intend to go ahead with their capex plans for the next fiscal. 

The impending implementation of the goods and services tax (GST) has kept spirits buoyant. The cement dealers in Gulbarga believe that and infrastructure spending can set right a whole host of issues caused by demonetisation. Erode, which has struggled with its textiles industry, is a lot more gung-ho when the conversation shifts to GST and how the new tax structure will help local industry. If GST is awaited there, textile companies in Ahmedabad are praying hard that the GST rate is textile-industry friendly. 

Demonetisation is slowly being surmounted and business overall is hoping for life to return to normalcy. That alone will propel the growth story and take care of a whole host of issues. With over 60% of the respondents confident that business will be better in FY18, there is reason to cheer.

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