Financial Crisis and India: Who Pays the Price?

On November 3, the Prime Minister of India, Dr. Manmohan Singh urged the Indian industries, not to cut jobs. He said, “While every effort needs to be made to cut cost and raise productivity, I hope there will be no knee-jerk reaction such as large scale layoffs, which may lead to a negative spiral.” Things are however not turning out as advised by the economist PM.

Job loss in the Indian Economy

Already, we have seen that the performance of the Indian corporate sector has been adversely affected. The results of the second quarter for this fiscal year show that the aggregate profit growth for the corporate sector as a whole has come down. The main reasons for such decline in profits being rise in interest costs and raw material prices. In the wake of such decline in profits, the Indian corporate sector had to cut down on costs. In this regard, retrenchment of workers was thought to be an effective way of cutting costs. The move by Jet Airways to retrench 800 workers was done primarily on the basis of the above thinking on the part of the Jet management. However, due to much public outcry and political pressure, the Jet management had to withdraw its decision. This was however only the beginning of the story. Almost all the sectors of the economy have resorted to job cuts or a cut back in the production in order to cope with the economic crisis. We give some of the major decisions of job cuts or production cuts on the part of the Indian corporate sector in the wake of the financial crisis.

• India’s leading truck maker, Tata Motors, announced the shutdown of its Pune unit for six days in November, which will follow a three-day closure of its Jamshedpur plant.
• Ashok Leyland, the second largest producer of trucks, drove in tandem, slashing its weekly working days to three.
• JSW Steel opted for a 20-per cent cut in output this month.
• Another steel maker Essar also has decided to reduce capacity utilization.
• Tata Steel’s UK subsidiary, Corus, has also affected a similar cut in capacity utilization. It has also decided to axe 400 jobs.
• DBS has decided to cut 900 jobs
• Cement manufacturers have reduced capacity utilization to about 85% because of a sharp fall in demand from the realty sector, which consumes about 55% of the total production of 200 million tonnes.

(The above data is taken from: More Companies Opt to Trim Man Hours, Cut Production, Business Line, 8 November 2008)

• Nearly 150 trained pilots and hundreds of trained airhostesses have been rendered jobless as the economic turbulence is forcing airline companies to ground a significant part of their staff. (150 Airhostesses, Pilots Get Grounded, The Economic Times, 8 November 2008).
• Even in the Finance or the IT sector, the threat of job loss is looming large. For example, Fidelity National Information Services (FIS) has given pink-slips to over 100 employees at its Chennai operations, which constitutes more than 10% of its staff in the metro. (Over 100 FIS staff get pink-slips, The Economic Times, 8 November 2008).
• L&T Infotech, the wholly-owned subsidiary of the country’s largest engineering company Larsen &Toubro (L&T), is trimming down its staff by asking some employees to resign. It is estimated that the number of forced resignations till now is around 100. (L&T IT Arm Starts Trimming, The Economic Times, 8 November 2008).
• At the same time, the international banks’ offices in India are significantly down sizing their work force. Goldman Sachs slashed its workforce by close to a dozen in its Mumbai office. Credit Suisse, another recent entrant in India, has also slashed some jobs in the country. (These Are Mean Cruel Times, Indian Arms of I-Banks in Lay-off Mode, The Economic Times, 8 November 2008).
• The most severe job cut however has been witnessed in the textile sector. It is estimated that over the last six months there have been 7 lakh job losses in the textile sector. The textile sector is particularly important because it provides employment to more than 3.5 crore workers. It is also projected that this number can increase to 12 lakhs in the next three months. (Textile Cuts 7 lakh Jobs in Six Months, The Economic Times, 8 November 2008).

Why Such Job loss?

The question that naturally arises is what accounts for such across the board and massive lay-offs in the Indian economy? There are several reasons for this. Firstly, as has been already mentioned, job cuts is a way of reducing costs to the companies, which they are resorting to in the wake of rising interest and raw material costs. However, the malaise goes deeper than this. This is evident from the fact that not only has there been a job cut, but many companies have been forced to suspend or reduce production in the recent times. This points to the fact that the companies are trying to reduce their capacities. Such reduction in capacity utilization is symptomatic of the fact that there is not enough demand in the economy. For example, for the auto manufacturers like TATA Motors or Ashok Leyland, there is just not enough buyers to buy their products. In this context, to carry on production will only result in accumulation of inventories, which these companies do not want- hence the decision to suspend production in their plants. As far as the steel sector is concerned, the biggest demand from steel in India comes from the construction and the real estate sector. Now, in the wake of the financial crisis, the realty sector has been substantially adversely affected. As a result the demand for steel in the country has been hit. Moreover, since the crisis is global in nature, there is not even enough external demand for steel, which can compensate for the drop in the domestic demand. In the absence of demand for steel, the companies have been forced to cut back on production.

The case of the textile sector is particularly worrying. This is because this sector employs a very large number of people. Moreover, the people who are particularly losing their jobs in the textile sector are those workers who are daily wage earners. The question is why such severe job cuts are being witnessed in the textile sector. One of the major sources of demand for the textile sector is the external demand. In other words, there is a strong export demand for the Indian textile sector. In 2006-07, the textile exports comprised of 12.9% of the total exports from India. (Economic Survey, 2007-08, Chapter on External Sector). Now, with the global financial crisis and the impending recession in the advanced capitalist countries, there has been a slow down in the export demand for Indian textile sector. With such decline in the demand for the Indian textile sector, there have been severe job losses.

Lessons for the Prime Minister

The economist Prime Minster needs to learn proper lessons from this. His argument to industry not to retrench workers is nothing short of a hogwash. This is because, as the Finance Minister and now the Prime Minister of the country, Dr. Singh has presided over a systematic entrenchment of the Indian economy into the logic of the market. Today, the organized sector employment growth rate has reached minimal level, with the employment in the Public sector turning negative. (Economic Survey, 2007-08). On top of this, there is the new mantra of labour market flexibility supposedly to increase the efficiency of the Indian industries. These are nothing but euphemism for doing away with whatever little social security that the workers have in this country. Now, when the workers have been subjected to the tyranny of globalization, Dr. Singh is now paying lip service to them, on the eve of the elections.

This impasse has been created by the votaries of neo-liberal reforms in the country. Over the last few years, the Government has self-imposed strict limits to fiscal expenditure as a result of following the policies of globalization, the FRBM Act being one example. Instead of ensuring proper expenditure on the part of the Government aimed at uplifting the conditions of the poor what has been done is providing sops to the corporate sector, in the form of tax exemptions. This has allowed the corporate sector to rise to dominance in the Indian economy. At the same time, the demand for the products, primarily high end, of the corporate sector has been provided by the debt financed consumption of the middle class and the rich. Now, with the financial crisis, the banks are becoming less forthcoming in providing such easy debts to the middle classes. That is why there has been consistent demand on the part of the press as well as other stakeholders to reduce the interest rates on housing and other loans, in order to again stimulate the debt financed consumption. In fact, the Finance Minister compelled the Public Sector Banks to reduce their rates. This route of stimulating demand is however problematic because of the following reason. What is essentially done through this lowering of interest rate is to neglect putting more purchasing power to the majority of the people and lure the middle class to consume, thereby keep the demand in the economy afloat. What is missed is the fact that such soft loans in return may give rise to sub-prime loans in the Indian economy, which can cause serious problems for the banks. Already it has been seen that the largest credit card issuer, ICICI Bank has shown flat profits and significantly enhanced loan loss provisions. The second largest credit card issuer, the State Bank of India’s SBI Cards, posted net losses in the past two quarters. On December 31, 2007, its non-performing assets, or credit card debt that could not be collected by the company, stood at 16.28 per cent. This is likely to have grown since then. (Now, the Credit Card Crunch, Jayati Ghosh, Frontline, November 8-21, 2008).

Who Pays the Price?

In this context one of the most important issue is the asymmetry in the impact of the boom and the bust. When India was growing at a very high speed riding the boom, lakhs of farmers committed suicide in the country, the employment rate declined, the rate of decrease in the poverty rates, even according to official estimates declined, children remained malnourished and millions died of curable diseases. At the same time however, India produced the largest number of billionaires, shopping malls and luxury hotels for the rich, high profile jobs for the English speaking elites. In other words, during the boom in India, the rich got richer while the poor got poorer.

Now, the signs of the impending slow down in the Indian economy are global in origin. It is the speculators in the Wall Street who have manufactured this global crisis riding on greed and free market ideology. And who suffers the consequences of this in India? We have already seen that 7 lakh people have already lost their jobs in the textile sector alone, majority of them being wage earners. Factories of TATA are being shut down, investment projects are being postponed, production is being cut-the sufferers in all this are the working people, whose jobs are at stake, whose salaries, job security and other benefits are at stake.

One might actually argue that the riches are also losing out. It is reported that the collective wealth of India’s wealthiest have fallen by $212 billion. Still, the net worth of Ambani is $20.8 billions in a country where 77% of the people live on less than Rs 20 per day. Moreover, this loss in the wealth that is being reported in the financial press is more of a notional loss than any original erosion in their asset position. This is because this loss is based on the valuation of the paper assets (stocks) of the industrialists, which have indeed decreased in the market.

As far as the middle classes are concerned, yes there have been losses for this section of the population. The option of high consumption on the basis of soft loans has also dried out to a significant extent. This however might be transitory since the banks are already easing out different rates. A section of the white collared people has also lost their jobs. What is noteworthy however is the response of the media as well as the establishment to this problem of the middle class. Only 1900 people were sacked by Jet Airways, which was indeed a terrible thing, and the entire media cried foul over it. Today 7 lakhs poor people have lost their jobs in the textile sector only. The media is silent on their plight. Thus, it is seen that it is the working people of the country who are mostly paying the price in the aftermath of the financial crisis and its impact on India.

What Can be Done?

What can be done is however very simple. The Indian economy is riddled with large scale poverty and misery particularly in the rural areas. What is needed is Government expenditure in a big way in the economy, putting purchasing power in the hands of the people whose increased consumption can then be a very important source of demand in the economy. This can be done by providing employment to the masses, which will also help in eradicating poverty to a significant degree in India. One step in this regard is to implement the NREGA effectively in rural areas and expand to urban areas. Moreover, government investment should be forthcoming in major infrastructure areas like building roads, railways, hospitals, schools, colleges etc. This will not only generate employment for the masses but act as major social assets in the future. Today, China is already doing it.

The financing for these projects is not an impossible task if one sees it outside the prism of the ideology of neo-liberalism. What is first required in this regard is to do away with the FRBM Act and ensure more Government expenditure by enlarging the fiscal deficit. What is needed is a political will to implement policies for the upliftment of the poor and not merely directed at filling the coffers of the rich.

The Financial Crisis and India Inc.’s Performance: Where Are We Heading?

The recent growth scenario of India has been quite remarkable, with the economy registering 9% growth rate for the last 4-5 years. In order to ensure a higher growth rate of the economy, the Investment-GDP ratio must increase. In India, the investment-GDP ratio showed a marked increase over the last few years, starting from 2001-02.

Now, the question is what has led to this massive increase in the investment-GDP ratio. In other words, which components of investment have increased dramatically during this period leading to such a huge increase in the investment rate? This has been largely due to the performance of the corporate sector of the country. Over a long period of time, it had been the case that households’ investment has been the major source of capital formation in the Indian economy. However, in the recent past, the investment by the private corporate sector has increased more than that of the household sector. In other words, the recent increase in the investment rate and the growth rate of GDP has been led largely by the private corporate sector.

In this context of a private corporate sector driven growth in the Indian economy, it is obvious that the performance of the private corporate sector is of crucial importance to maintain the high growth trajectory in India. It is in this regard that the performance of the Indian corporate sector in the last quarter is a cause of worry.

In a study conducted by the Economic Times it has been found that India Inc.’s profit growth has witnessed a sharp slow down in the second quarter of the current financial year. It is found that out of 1,450 listed firms (excluding banks and oil & gas majors), aggregate net profit growth has come down to 5.7%, which was 25.8% in Q2 of 2007-08 and 9.9% during the first quarter of 2008-09. 20% of the companies in the sample have reported net loss as against 14% during the second quarter of 2007-08. (Source: India Inc.’s Profit Drive Takes a Beating, The Economic Times, 3 November 2008).

In another separate study undertaken by the Business Line it has been found that 116 companies out of a sample of 814 companies have seen a decline in the ‘value added’ (measured as the sum of ‘net sales’, ‘other incomes’ and net addition to inventory minus the value of raw material and stores consumption) during June and September 2008 quarters compared to their immediate previous quarters. (Source: It is Recession for One in Seven of NSE Listed Companies, Business Line, 3 November 2008).

The question that immediately arises out of this is what accounts for the decline in the profit for these companies. We know that profit is the difference between total revenue and total cost. Therefore, a decline in profit must mean a decline in the total revenue of the firm or an increase in the cost of the firm. As regards revenue, it has been found that at the aggregate level, growth rate of net sales of the companies in the sample was 28.3% during the latest quarter as against 17.7% for the same period last year. (Source: The Economic Times, 3 November 2008).

Thus, the decline in profit has to be accounted for by an increase in cost. The biggest component of the increased cost has been the increase in the interest rate. It is estimated that interest costs rose by 72% in the last quarter as against 26% during the same period last year. Added to this, there has been an increase in raw material prices for manufacturing industries, which has also pulled down profits. (Source: The Economic Times, 3 November 2008).

The question is what accounts for the increase in the interest rates as well as raw material prices for the industries. There are several reasons for this. Firstly, the rise in the interest rate is due to two basic factors. (a) In order to tame the rising inflation in India, the RBI announced hikes in the Cash Reserve Ratio as well as the repo rate in August 2008. In response to this tight monetary move of the RBI, the banks also hiked their interest rates on loans. (b) With the global credit crisis looming large in the horizon, the Indian corporate sector could not find loans in the international market also.

Secondly, the hikes in the raw material prices are mainly due to the hikes in the prices of oil, agricultural products, particularly food grains and steel at a global level. Most importantly, oil is a commodity which is almost universally used by all industries. Therefore, a hike in the price of oil is bound to increase the raw material prices in a big manner. (It is however the case that the prices of oil in the international market has decreased. But this has not been translated into a decrease in the domestic price of oil because of the high tax burden that the Government continues to impose on the people.) However, it must be remembered that this hike in the raw material prices that we are talking about is really not an Indian phenomenon but largely due to global economic problems. But with policies of globalization indiscriminately followed in India, it is but natural that all these problems have crept into the Indian economy resulting in problems for the common people as well as the corporate houses of the country.

Now, with the rise in the prices of raw material and higher interest rates, resulting in higher costs, the prices of end products of the companies also increased. This is mainly responsible for the increase in the revenue of the firms. “For instance, the country’s largest automaker, Maruti Suzuki, reported a 6% rise in net sales during the quarter even as it witnessed a 2.5% decline in the number of cars sold during the period. Consumer goods firm Hindustan Unilever, which recorded a 22% growth in the Fast Moving Consumer Goods business, attributed almost two-thirds of it to price increases.” (Source: The Economic Times, 3 November 2008). In spite of the fact the companies increased their prices, they could not improve their profit because of the fact that the increase in costs had been even greater.

In addition to this, the latest figures for Index of Industrial Production (IIP) show that the rates of growth of the manufacturing IIP indicate that growth in August 2008 for industry as a whole and manufacturing in particular were 1.3% and 1.1% respectively. This number was 10.86% and 10.75% respectively in the corresponding month of the previous year. This indicates that there has been a slow down in the manufacturing and industrial output growth rates in India. This essentially signifies that there is a serious threat of an industrial recession in India.

This slow down in the growth rate of industrial production is particularly important because of the following. In order for the industrial sector or the economy to grow, there must exist sustained demand in the economy. In India, as has been pointed out by many economists, this demand does not come from the majority of the population. Rather the majority of the population remains impoverished but still the demand exists in the economy because of the consumption of the middle class and the rich. This consumption is essentially fueled by debts undertaken by households from the banks or credit card companies. Now, in the wake of the financial crisis, the norms for such lending have been tightened, with the banks becoming less forthcoming in disbursing these loans. In other words, the avenue for sustained demand through this route has been substantially reduced.

However, in the absence of adequate domestic demand in the economy, the industrial sector might still continue to grow if there is adequate external demand for India’s export commodities. Exports to GDP ratio has increased significantly in the recent past, indicating a better performance of the export sector. However, as a result of the impending recession in the USA, the exports of India has been already adversely affected. For the first time in five years, India’s export growth has turned negative. Exports for October 2008 contracted by 15% on a year-on-year basis. This shows that the external demand route for the Indian corporate sector is also drying out in the wake of the global economic crisis.

The question that naturally arises is how to overcome the problem of slow down in the Indian economy. It has been already seen that both the debt financed consumption as well as the external sector currently is not being able to boost the demand in the economy. This demand boost can however be provided by the Government if it takes upon itself the task of injecting demand into the economy through higher Government expenditure. In the absence of private sector stimulus to growth, the only way out is for the Government to boost demand. However, our policy makers are so entrenched in the ideology of sound finance and neo-liberalism that they are incapable of thinking about this route of advance for the Indian economy.

It is the result of the policies of the Government that the corporate sector rose to the stature of the dominant investor in the economy. This investment while generated high growth could not increase the purchasing power of the majority of the people. With the private sector in a crisis of its own, in the absence of Government boosting demand, the conditions of the people will further worsen. It is time to go back to John Maynard Keyenes and argue like him for state intervention to boost demand.