|Cassandra? RBI governor Y.V. Reddy isn't
one, but the bank's report is alarming
country's gross domestic product (GDP) grew 9.3 per cent in the
last quarter of 2005-06, fuelled by dark horse agriculture, breaking
all projections and expectations. Industry grew an even more impressive
9.5 per cent. The India story was jogging along, Finance minister
P. Chidambaram and Deputy Chairman of Planning Commission Montek
Singh Ahluwalia assured us. "There is no evidence of overheating
in the economy. There is further scope for expansion," the
But that assessment was for the fourth quarter
of 2005-06 and, as economists and investors know only too well,
a quarter can be a long time for an economy. In April-May 2006,
i.e., the first two months of the first quarter of 2006-07, a
new picture seems to emerging, and the first impressions of it
aren't that positive. But statistics are like bikinis; they hide
more than they reveal, and, we repeat, these are only first impressions.
The Reserve Bank of India's (RBI's) Weekly
Statistical Supplement released on June 16, 2006, reveals a credit
contraction (both food and non-food) of Rs 13,962 crore in the
April-May 2006 period compared to the previous corresponding period.
The disaggregated figure for non-food credit, too, shows a downturn.
Non-food credit grew Rs 36,038 crore in the first two months of
2005-06 compared to a negative growth of Rs 12, 334 crore in April-May
In absolute terms, the
credit offtake this year has been a negative Rs 13,962 crore compared
to Rs 40,644 crore in April-May 2005.
Deposit mobilisation, a key tool to fund
credit expansion, is also down. RBI figures reveal that scheduled
commercial banks have aggregate deposits of Rs 27,214 crore in
April-May 2006-07 against Rs 78,671 crore in the corresponding
period of the previous year (see Sign Of Things To Come?).
Is this the first sign of an incipient slowdown?
Or is this a result of the window dressing that banks resort to
in the final quarter of every financial year to doll up their
"There is usually a deceleration in
credit in the first quarter," says G.V. Nageswara Rao, CEO,
Commercial Banking, IDBI Bank. Several bankers agree with Rao,
but caution that the gradual hardening of interest rates and the
higher provisioning mandated by the apex bank for real estate
and personal loans can significantly damage the retail credit
party and, by extension, the overall India story.
RBI data reveals that retail credit has grown
by 40 per cent per year since 2001-02 and contributed one-fourth
of the incremental non-food credit in 2005-06. As a result, the
share of advances to individuals increased from a low of 10 per
cent of total bank credit six years back to nearly 25 per cent
in January 2006. It follows, then, that a slowdown in loan-driven
consumption-especially in the housing, auto and consumer goods
sectors, which have direct linkages to several hundred other industries-will
affect the fortunes of all these sectors.
P.K. Tayal, Chairman, Bank of Rajasthan,
strongly refutes this logic. "Domestic credit demand from
all sectors of the economy remains robust. This is actually a
slack season," he says.
There is a logical, and less alarmist, explanation
for the slowdown in corporate credit offtake. Most companies have
earned bumper profits over the last two-to-three years and several
of them have raised large sums from the primary market prior to
the crash in the secondary market. They can, thus, meet their
funds requirement through internal accruals, overseas borrowings
and by dipping into the funds they have mobilised from the market.
Hence, the rationale of this argument goes, they have little use
for bank funds.
The real danger to the Indian story, say
bankers, will come from an oil shock-induced global slowdown and
consequent overcapacity in the domestic market. Alternatively,
the inadequacy of Indian infrastructure can also create bottlenecks
for growth. A recent RBI report warns that sustaining the growth
of manufacturing, the key driver of industrial growth, will depend
critically on bridging the large gaps in physical infrastructure.
So, is the economy gradually losing steam?
It's still too early to reach any conclusive decision on this.
But the primary evidence, despite the pat explanations, is disturbing.
In the days ahead, all eyes will be glued to bank credit offtake,
and other economic indicators like sectoral growth rates. Nobody's
suggesting that the 9.3 per cent GDP growth figure is a flash
in the pan, but it's best to be cautious.
The fortnight's burning question.
Will the government succeed in overcoming
the Left's opposition to disinvestment this time?
Khattar, Managing Director, Maruti Udyog Ltd
The Cabinet Committee would not have cleared
the proposal unless the government was confident of pushing through
its disinvestment agenda this time. The government must have received
ample indication that it will be able to overcome all opposition
because any reversal or rollback will cause great embarrassment.
Sengupta, Congress-backed Independent MP
All I can say is there is no Left opposition
to disinvestment this time round. So, you can judge yourself,
the fate of the decision.
Basu, CPI(M) MP
I am not an astrologer and cannot say if the government
will succeed or not. All I can say is that we will oppose this
unilateral decision tooth and nail. It's a blatant lie that the
Left had agreed to this. Earlier, the Union Mines Ministry had
said the proceeds from the sell-off will be used to inject fresh
funds into NALCO, but now it seems the funds will be used to meet
the budgetary deficit. We cannot support that.
& Fire In Maharashtra
| BETWEEN THE LINES
The new policy:
Gives industries flexibility to deploy their labour
the powers of the Labour Commissioner to the designated Development
Commissioner for SEZs
for single window clearances relating to various labour laws
unannounced visits by factory inspectors
all industrial units and other establishments in SEZs as Public
Utility Services under the provisions of the Industrial Disputes
Maharashtra government has quietly introduced new hire and fire
norms for Special Economic Zones (SEZs) in the state and has even
notified them in its Special Gazette dated May 2, 2006. This means
"ancillary" staff like canteen workers, gardeners, cleaning
staff, security personnel, courier service employees, workers
engaged in transport of raw materials and finished products and
loading and unloading of goods within factories located in SEZs
will no longer be able to claim permanent status as a matter of
"The Congress knows we will oppose such
laws in Parliament, so it has got its state government to pass
it," says Shyamal Chakraborty, National Vice President, CITU.
However, Govind Swarup, Principal Secretary, Employment and Self-Employment
Department, Government of Maharashtra, says: "This is an
operational set of policies for improving the lot of labourers."
The state has belled the cat. It's a test
case; if employment figures head north following this, it will
puncture the stand of the Left and others whose ideological orientation
is holding up job creation in the economy.
Story Still Intact
The pullout of some IT firms from India points
only to the failure of the captive model.
Some of the recent
headlines have not been pretty: Apple logs out of India; Pervasive
shuts down Indian operations; Sykes bids India goodbye; Dell to
relocate some BPO work back to the US; Powergen packs up. Critics
of the it outsourcing story have seized upon these announcements
to buttress their argument that India is getting way too expensive
and that the quality of the Indian workforce is not really up
to scratch. This latter argument, in particular, has gained ground
as some companies have specifically cited quality issues as the
main reason for their pullout from India.
Does the steady trickle-no; despite the screaming
headlines, it's not a deluge yet-of such bad news signal beginning
of the end of the Indian it outsourcing story? No, say industry
analysts emphatically. John MaCarthy, VP (Asia Pacific Research),
Forrester, a Cambridge, Massachusetts-based technology and market
research company, says: "A few failures among thousands of
success stories do not herald any kind of slowdown. Let us not
confuse issues here. We have to examine whether the failure is
that of the captive model (for those who came in late, a captive
is an exclusive setup which caters to in-house needs of a company
only) or that of Indian it model. I feel it is more a case of
This is an argument with which Avinash Vasishtha,
CEO, Tholons Inc., a Washington-based services advisory and investment
firm, agrees. He says a majority of the companies which have had
bad experiences have not done their homework properly. "Companies
must have a very clear idea of what can be outsourced, when it
should be outsourced and at what price such outsourcing will be
financially viable. Companies must figure these issues out carefully
for effective results. This requires process maturity that third
party service providers like WNS and EXL have mastered,"
Incidentally, most of the captives which
have failed do not have sufficient economies of scale; they, thus,
find it difficult to attract and retain talent and are also unable
to spread their overheads across a sufficiently large number.
Vasishtha also points to another significant fact: some players
like Pervasive have not actually withdrawn from the Indian market;
they have simply shut their captives and transferred work to a
third party vendor (Aztec Software in this case).
With infrastructure management services,
the third wave of outsourcing-the first was in services, and the
second in BPO/ITEs-set to take of in a big way, the Indian it
story is still intact.
Indian BPO companies are now moving up the
value chain and closer to customers.
After five years
of running an offshore call center in India, Powergen, a British
energy company, decided to move it back to the UK in mid-June.
This, its Managing Director Nick Horler says, will create 500
new jobs in Bedford, Bolton, Leicester, Nottingham and Rayleigh
"and provide better quality service to our clients and reduce
the number of complaints". Media reports quoted him as saying:
"When customers contact us, they need to be confident that
their query will be fully and quickly resolved. Although the cost
of overseas outsourcing can be low, we're simply not prepared
to achieve savings at the risk or expense of customer satisfaction."
Everyone BT spoke to for this report was
emphatic that this move in no way signals the end of India's voice-based
business offshoring story (also read it Story Still Intact, page
18). They point out that several Indian companies, too, are getting
into nearshoring, or the practice of setting up call centres near
client locations. "This does not indicate that clients are
not comfortable with offshoring work to India. Instead, it shows
that Indian business process outsourcing (BPO) companies are moving
up the delivery and value chain. The business is no longer about
cost arbitrage, but about process expertise," says Ananda
Mukerji, CEO and MD, ICICI OneSource, a large Indian BPO company
which will, in July and August, open two nearshore centres in
Northern Ireland. "Clients have realised that the Indian
offshore centres have process discipline and process improvement
capabilities which are lacking in their onshore operations, and
they want us to replicate these qualities in their onshore centres,"
Progeon, Infosys' BPO, too, has two nearshore
centres in the Czech Republic and China. The former was set up
at the request of its client whose worldwide operations it services
in 16 languages, including Finnish, Italian and Russian. It employs
110 people; 20 per cent in the voice-based business, and the remaining
in transaction processing. "The documentation has to be done
in various European languages, so it was imperative for us to
set up a nearshore location," says Vijay Menon, the company's
Vice President (Marketing). The China centre currently has less
than 50 people, and was set up because the nature of the job required
expertise in the local language.
HCL Technologies, which pioneered the concept
of nearshoring in 2001, today has two delivery centres in the
UK and one in Malaysia which handle front and back office processes
and a technology help desk. The rationale for nearshoring: geographic
risk hedging, process-related sensitivities, timeline alignment
and cultural affiliation. Says Sumit Bhattacharya, Executive Vice
President, HCL Tech.: "Having a global delivery footprint
is a pre-requisite for these."
Powergen's exit from India, experts say,
should not be seen as the beginning of a trend. "About 90
per cent of call centres focussed on the US and UK markets have
voice-based business models. And though the voice business is
very capital intensive and prone to risks, it is here to stay,"
says Suresh Ramani, COO, Intelenet Global Services, which is looking
to take over boutique firms in the US and the UK to meet rising
demand for nearshore delivery centres.