India Inc.: Challenges ahead in 2009

The recession in the Global Economy that started in 2008 is likely to continue deep into 2009, causing a severe contraction in economic activity. Severe recession is likely to grip US, Europe, Japan and other advanced economies, even emerging markets will face a severe slowdown. The situation is grim and is leading the global economy towards 'Stagflation', a situation which combines the ill effects of economic stagnation and deflation, where aggregate demand falls short of aggregate supply.

India Inc. will have to grapple with this grim global situation for at least the first half of 2009. The internal signals available are not encouraging at all. Even as inflation is hurtling towards a five year low (it is expected to slide to a level of 2-3% by March 2009), domestic demand seems to be contracting at a rapid pace. The credit crunch has started hurting the growth plans of companies, uncertainty of employment is responsible for the decline in consumption levels. The stimulus package by the government is going to have a limited effect.

India's industrial production was down 0.4% in October '08, exports have declined by 10% in November '08 for the second consecutive month. There is a case for further rate cuts by the RBI in the wake of decelerating inflation, but the banks may not be able pass on the benefits to the end users unless administered deposit rates are cut by the Government. Banks will not be able to reduce deposit rates further as the interest offered on Govt. schemes (PPF, NSC, Post Office deposits) range between 8-8.5%. Prudence calls for a 0.5-1% cut in these rates but the govt. in an election year may not be able to bite the bullet.

The situation is alarming, the government is trying to boost consumer spending by 'Demand pull' factors, but to sustain the momentum supply side factors need to be augmented in the right earnest. Infrastructure spending needs to be boosted to remove bottlenecks in supply. This can be done by cutting costs through efficient management of resources. India Inc. would also have to cut costs to stay afloat in these challenging times. As far as investors are concerned, they can go for selective investment in cash rich companies which thrive on domestic consumption. However, keeping in view the turbulence in global markets, a 'buy on decline' strategy may be prudent.