Muted mood: India is heading to all-important festival season under a hailstorm of bad news

A slowdown can be a mixed blessing. Yes, it's nasty, anxiety-inducing and a dampener of sentiment. But it also forces the government to review status quo, companies to be ingenious and consumers to chase value. It can be an exercise in renewal. At least as long as things don’t start spiraling out of control.

Many companies are trying to focus on this silver lining amidst the current slowdown. It is, they say, an opportunity to become more efficient, delay some spending and review processes. Tyre-maker CEAT Ltd has decided to cut ongoing capital expenditure by 20%, delaying some of the machinery purchases at its factories. While demand from auto companies are down between 10% and 40% across segments, dealers are also asking for a longer term credit cycle.

Luggage maker VIP Industries, which has seen a 9% growth in sales in the first quarter as opposed to the usual 20%, is trying a different tack —cutting flab, taking a microscopic lens to expenses to protect bottom line, and launching new products such as belts and flip-flops to help the top line. Auto-maker Mahindra & Mahindra is doing the same, going beyond the usual scrutiny of “inventory, receivables and payables” to reviewing incentives, subsidies and refunds. “For us, every drop in the ocean is equally important,” says Mahindra Group CFO & CIO VS Parthasarathy.

If India’s macro numbers clearly show that everyone needs to hunker down for an unknowable period of slowdown, the imminent festival season — the period spanning the months of September, October and November — will be critical in understanding the depth and sectoral nuances of the weakness. For sectors such as auto and consumer durables, these three months, peaking with Diwali, can account for 25-35% of annual sales. It is this critical sales window that is now under threat.

People wait to buy cars or homes around this time, and normally a spurt in the sales of apparels, consumer durables and foods are also seen. However, with relentless bad news emerging on the economy front in August, the mood is muted. “There is a sentiment issue; people are not spending money even if they have it. It’s classic recession,” says Sudip Ghose, managing director of VIP Industries.

Sentiment hit a low on August 30. Barely an hour after finance minister Nirmala Sitharaman announced big-bang mergers of PSU banks, came the biggest dampener in recent times. The Central Statistics Office said gross domestic product (GDP) growth has fallen to a six-year low of 5% in the April-June quarter, down from 8% in the same period last year. The previous quarter, January-March of 2019, had seen 5.8% growth. A series of bad macro numbers hit hard around the same time. The rupee recorded its sharpest one-day fall in six years on August 5 and fell further, touching 72.40 against the US dollar on Wednesday last week—the lowest level of 2019. Factory output growth led by contraction of manufacturing, mining and capital goods slipped to 2% for the month of June, as against 7% registered for the same month last fiscal, according to Index of Industrial Production (IIP) numbers released last month. For April-June, IIP grew at 3.6%, down from 5.1% in the corresponding period of 2018. The bad news flow could not have come at a worse time. Festival buying seasons of Onam and Ganesh Chaturthi are already on. Dussehra, Durga Puja and Diwali come up in October. The question is, can sentiments revive now for the festive buying to give the economy a consumption-led leg-up?

In Search of a Consumption Booster

Typically, there are three engines that can boost an economy — exports, domestic consumption and government spending. While exports from India have been stagnating for half a decade now, the Central government is expected to spend to try and boost growth. Domestic consumption on the other hand remains an X-factor. Former Union industry secretary, Ajay Dua, anticipates that white goods and auto companies that get 35% of their sales in the 10 weeks leading up to Diwali are unlikely to meet their festive season targets this year. The bad news flow has remained unabated. Consider the news that emerged just last week. India’s largest car maker, Maruti Suzuki, announced a two-day production shutdown at two of its plants. Truck-maker Ashok Leyland announced a five-day shutdown that started on Friday. One of the largest realtors of India, the Lodha Group, handed out pink slips to 400 employees. Zomato said Saturday it was laying off 450 employees.

Pronab Sen, the former chief statistician of India, and currently country director for the India programme of the International Growth Centre (IGC), feels that one will need to address the root cause behind the slowdown — lack of rural demand. Sen feels that government spending should not flow into big-bang infrastructure projects and should instead be used to increase outlay significantly in areas such as low-cost housing, rural roads and the Mahatma Gandhi National Rural Employment Guarantee Scheme. Essentially, these are measures that put more money into India’s villages. Arun Maira, a former member of the erstwhile Planning Commission, also feels that the government should focus on putting more money in the hands of the people so consumption can get a boost. “The whole problem is consumption. The problems of the rural economy have now spilled over to urban formal economy. Given the pathetic IIP numbers, I doubt if the festive season can help,” Sen says.

The government is no longer denying there’s a slowdown. Finance Minister Nirmala Sitharaman did a course correction during the last fortnight announcing a raft of measures to boost the economy. The Reserve Bank of India (RBI), on its part, has now asked banks to link loans to retail customers and small companies to external interest rate benchmark, a measure that is expected to bring down home, car and personal loans, thereby benefitting consumers. The prescription seems to be correct, but the million dollar question is whether the incremental sarkari doses are strong enough to add up and revive economic growth. The festive season won’t halt for the economy to catch up, however.

Bank of America Merrill Lynch India economist Indranil Sen Gupta also feels the revival will take time and attributes the slowdown to a liquidity crunch that started in 2018. “The government and the RBI have taken a set of measures to ease the liquidity situation. However, these take effect with a lag. My estimate is that the changes will impact only by the end of 2019.” There are divergent views on how soon the slowdown may lift. While Parthasarathi of Mahindra feels this is just “stress” and not really a slowdown, Anant Goenka, MD of CEAT, thinks that it will take a year for demand to revive, although some improvement will be seen from the October-December quarter, as the corresponding quarter of 2018 had been a slow one, too. The sluggish growth has now posed a question mark on growth targets for the year. The Economic Survey 2019 had predicted a 7% growth for the current fiscal. Earlier this week, rating agency Crisil downgraded its GDP forecast for India for the current year financial year to 6.3%. International rating agency Moody’s predicted a low growth at 6.2% for the financial year, saying the economy is still sluggish, citing multiple reasons ranging from low hiring to rural distress.

Deals, Discounts and Green Shoots

Multiple sectors affected by a slowdown have now deployed their own tools to push sales. Discounts and deals as well as special loan offers are on the cards. Some people are already bullish.

Ambuj Chandna, senior executive VP and head of consumer and small business loans at Kotak Mahindra Bank, feels that the usual 15% bump in the festive season will be there this year too. The players at the forefront of the festive consumption challenge are keeping a brave face, increasing retailer margins to enable higher discounts to consumers, designing easier financing schemes, spending more on marketing and even speaking about green shoots. Most large retail chains have been facing slowing sales over the last three quarters. The last endof-season sales around Independence Day saw business drop by at least 5% over the previous year. Retailer Spencer’s, which also acquired Nature’s Basket, has now roped in actor Sonam Kapoor Ahuja just before the festive season to connect with consumers.

Retailer Lifestyle has increased discount offers in-store to push bulk sales per consumer. “However, average billing is stagnant. Walk-in in malls are under pressure. Same-store sales growth has come down,” Lifestyle MD Vasanth Kumar says. He added that while sales growth in Kerala led by Onam is in double digits, it won’t be a true indicator for the festive season since last year, Kerala suffered due to floods and had low sales. “Durga Puja sales in the east will be the first indicator for the festive season this year.”

Jewellery and watch retailer Titan, too, seems to have struggled but now sees light at the end of the tunnel. Sandeep Kulhalli, senior vice president for retail and marketing at Titan’s jewellery division, admits there have been negative sentiments around the rising gold prices and the consumption-led slowdown. “We feel that gold prices have stabilised at a new normal and the festival season, as well as the wedding season, will see a 25-30% increase in sales over current present levels.” For the consumer electronics and appliances industry, the festive season accounts for around 35-40% of the annual sales. While the industry (except televisions) had grown between January and June 2019, sales started to slump from July and August was 8-10% lower than last year. The focus is now on finding financing schemes and offering retailers a bigger margin so they can offer deeper discounts in turn.

Godrej Appliances business head Kamal Nandi said financing schemes this year will be for longer duration, and low or no-cost EMIs. At present, finance schemes account for around 60-65% of white goods purchases in the cities, while it¡¦s around 25-30% in smaller towns. We are seeing most of the purchases in the Onam sales in Kerala are on finance, says Nandi.

Big-Ticket Problems

The bigger purchases, that of a car or a house, that also happen during the festive season are at the far end of the discretion spectrum, and are usually the first to be dropped from the shopping list during a downturn. Both sectors are now awaiting sops from the government and there were favourable noises last week about GST sops to the auto industry and some easing for the real estate sector.

Sales during the festive season this year will depend largely on how effective the government stimulus package is. A beginning has been made with announcements by the finance minister, but the actual impact measured in terms of enhanced liquidity-creating scenario where potential home buyers make the move from being fence sitters to actual buyers during the festive season remains to be seen, says Niranjan Hiranandani, MD, Hiranandani Group.

For the auto sector facing high double-digit drop in sales, there are no easy solutions. Vinkesh Gulati, vice president, Federation of Automobile Dealers Associations (FADA), says that while September started with a small improvement in enquiries, bookings are at 25% less than last year. ¡§We¡¦re hoping that the August and September slowdown will end in October. All automobile and two-wheeler companies are hopeful of pushing stocks with higher discounts and incentive schemes. We hope for 15-25% better sales in October compared to last year.

Rajan Wadhera, president, Society of Indian Automobile Manufacturers (SIAM), and president for automotive sector at Mahindra & Mahindra, also admits that the last five months have been very bad for the automobile industry. He pinned the industry¡¦s hopes on positive moves by the government in the area of credit and lending. ¡§The auto industry is living on hopes that these will translate into a positive stimulus and the two festival months of September and October will be better than the last five months.

Maruti Suzuki is focusing especially on the rural car buyer. The company believes that for revival, rural sales are important. We are happy that the monsoons have been good as that immediately boosts the customer behaviour in rural markets, says Maruti Suzuki executive director Shashank Srivastava. But Pronab Sen points out, as seen in the last few years, a good monsoon no longer guarantees rural prosperity. India has seen multiple instances of surplus crop leading to a price crash, causing further rural distress. No answers have been forthcoming from Indian policymakers on a crop surplus-led crisis yet. With religious festivals kicking in one after another, the economy could do with some blessings, too.

Source:- https://retail.economictimes.indiatimes.com/news/industry/muted-mood-india-is-heading-to-all-important-festival-season-under-a-hailstorm-of-bad-news/71032509