To have a correct assessment of the implications, we cannot have a generalized perspective
The increased risk averseness and lower participation by foreign institutional investors could possibly have an impact on the growth prospects of our economy
Shiv Agrawal, CEO, ABC Consultants, in an exclusive to People Matters clears the air with respect to the talks of slowdown, hiring freeze and policy lock jams that have gripped the nation post S&P downgrading US long term debt
Ever since Standard & Poor’s downgraded the US long-term debt rating to AA+ with a negative outlook (August 5, 2011), the world was apparently engaged and worried that the American economy was headed back into recession while Europe appeared vulnerable to another shock. The implications of the US downgrade and the sovereign debt crisis looming large over the European continent was apparent, an increasingly uncertain and challenging environment lay ahead. So much so that on the morning of August 8, the global equity market tumbled between 2 to 6% and the Indian markets fell by 1.8%. The mayhem and bloodbath at the stock exchanges did remind one of September 2008, when things had come to a standstill, however the turn of events in 2011 is different from 2008.
While there is no crystal ball, predictions have been flying thick and fast as to what are the implications on the Indian economy. While a majority would argue that India being largely domestically driven is in large parts insulated from the crisis even with a temporary hit to growth; but what needs to be understood is that various aspects of the economy would invariably react differently to the crisis and sluggishness in growth. Agrawal points out, “To have a correct assessment of the implications, we cannot have a generalized perspective. The entire economy needs to be looked at as a sum of parts of the various sectors and the implications of the crisis analyzed, e.g. while technology/IT will see some slowdown, sectors like FMCG and consumer durables will not have any impact.”
If at all the worst comes true, the slowdown will not be a repeat of 2008 like situation. The Indian economic growth story is robust and the current uncertainty will cause no more than minor blip in its growth trajectory. Experts argue that the impact of the recent global developments of 2011 will be softer than as compared to 2008. Agrawal adds, “As compared to 2008, the efficiency of companies have increased, they are better stocked and hence prepared to tackle any impact.” While it is true that learning its lessons from the financial meltdown of September 2008, India’s IT companies have diversified, yet most of our revenues in the sector come from this region. Further a number of Indian companies depend on the US for capital; a weaker economic activity in the US will undoubtedly affect the sentiments of capital flow. The increased risk averseness and lower participation by the foreign institutional investors could possibly have an impact on the growth prospects of the markets.
Meanwhile the greatest concern doing the round is apprehensions raised by industry bodies on freeze in hiring. Ruling out any scope of job reduction, Agrawal says that, “there is a shortage of good talent and hence companies cannot be too harsh when it comes to downsizing/rightsizing. The previous experience shows that companies which managed their people and people practices well have gained more respect from employees.” It is equally true that India Inc. would go slow on hiring in the face of weakening global economic scenario. Agrawal adds, “On the overall, there will be no kneejerk reaction, it is only that the cycle time has increased (companies are taking longer time to close positions and this will continue) and there is a degree of caution but no panicking.” In fact, post September 2008, companies have been cutting fat in terms of manpower in order to streamline their operations. Ideally companies will opt for talent optimization and not go overboard with aggressive hiring.
During the global financial crisis in 2008, several countries, including India, had rolled out stimulus packages facilitating monetary expansion and lower taxes to mitigate the impact of the slowdown. Unlike 2008, there have been no cuts in the policy rates; in fact, the RBI has been continuously increasing the rates. The government has been very vocal in stating that there will be no stimulus package this time around. While the government’s approach to no stimulus package is driven by its intent to rein in fiscal deficit; experts feel that by saying so it is merely trying to put up a brave face. If at all the worst were to happen, the government will be forced to come up with economic stimulus package for export-oriented sectors (e.g. textiles). In either case there will be no impact on the private sector and the real economy will not be impacted.
The greater problem is the policy lock jam; the sooner it gets resolved, the better for the country. A look at the policy initiatives over the last few years make it clear that policy making in its real essence has been at a standstill and this is a real concern for the people. Echoing the view of the industry, Agrawal opines, “companies expect consistency in policy making; it is time for the government to put some teeth into reforms.” Fast tracking long pending reforms will help India attract foreign capital and create a more business friendly environment.