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September 10, 2013

Plunging Currency, Consumption Slowdown Hamper India's Economy

by Anjana Pasricha

As a plunging currency and a slowdown in consumption hamper India’s once vibrant economy, many industries are facing the prospect of plummeting profits. 

Usually at this time of the year, consumer companies look ahead to windfall profits. Starting in September, consumption increases because it is considered auspicious to buy new products such as cars and televisions for the main Hindu festival, Diwali, to be celebrated in November.    
    
But this year the mood in most corporate headquarters is pessimistic. The reason: the plunging rupee. India’s currency has lost nearly 20 percent of its value in recent months, pushing up costs for companies that rely on imports of raw materials. That is a large number ranging from electronics to automobiles.

Shantanu Dasgupta is vice president for corporate affairs and strategy at Whirlpool of India, which sells appliances such as washing machines and refrigerators. He says the depreciation of the rupee is a blow to their industry.  

“Considering that we have gone through a highly inflationary period for the last 18 or 24 months, the ability for any company in our industry to absorb these increases in input costs is limited or has vanished," said Dasgupta."So invariably it leads to an increase in consumer price finally.”

Prices of consumer goods are rising at a time when inflation and the collapsing rupee have already sent food and fuel prices spiraling. So consumers, already coping with higher monthly household bills, are cutting back on buying cars, televisions and refrigerators.
 
That is not good news for India, whose economy is highly reliant on domestic consumption.  The country weathered the 2008 financial crisis on the strength of high spending by a rising middle class. It became one of the bright spots in a weakening global economy for many investors and companies.
     
But the impressive eight percent growth rate during the boom years crashed to about half that in the April to June quarter of this year. Growth in private consumption hit a record low in the same period.  

Salary hikes have been lower. Bonuses in the festival season are likely to be less generous as many companies post their slowest growth in three years.   

As a result, the mood in India’s middle class has changed. Rahul Mane, a New Delhi resident with a young daughter, says he has no plans to buy any big items this festival season.  

“Two years ago, it was quite different," said Mane."Getting into a mall or spending, you did not have a second thought how you are going to manage. But now you know, every bit matters, so one is trying to save every drop... It’s pinching a lot. We’ve cut down a lot of things like moving around, going on small trips, even buying vegetables, fruits, we are moderating I would say. ”

Faced with a steeply higher bill for oil imports on account of the collapsing currency, the government has warned of further increases in gas and diesel prices and other austerity measures. This could worsen inflation and make a bigger dent in disposable incomes.

As a result, many fear that things will only get worse before they get better. Among them is Dasgupta of Whirlpool, who admits that this festive season is not going to be a “heady one.”  

“If you are going to withdraw subsidies on diesel and petrol, these are measures that are definitely good for fixing our economy, but are going to increase the cost of living thereby impacting our industry negatively, adversely," said Dasgupta."Hence, I don’t see any signs of immediate hockey stick or reversal of fortunes coming.”
 
The consumer slowdown is also contributing to an industrial slowdown. Many companies have put expansion plans on hold as their profits plummet and they post negative growth. Manufacturing output contracted in August for the first time in several years.  

D.K. Joshi is chief economist with Crisil in Mumbai and says this could mean the loss of jobs.

“Incomes have slowed down so demand slowdown is impacting.  Manufacturing has become less competitive," said Joshi."Indian manufacturers are going out and getting stuff produced outside India like in China. It is very difficult to turn this sector around.”

Policymakers are trying to sound a reassuring note, saying the economy may be down, but it is not out. However analysts say the word “austerity” is likely to be heard much more frequently in India in the months to come instead of the word “boom”, associated not long ago with Asia’s third largest economy.