Click to play videoAll over the world, governments have undertaken a raft of policies to deal with the financial crisis, a trend which is being seen as the biggest since the Great Depression of 1929.
The Reserve Bank of India on Tuesday carried out India's own bailout plan by pumping in Rs 20, 000 crore in order to protect mutual funds.
So with the financial crisis lurking closer home, is the party over for the affluent class in India?
That was the question raised on CNN-IBN show Face the Nation. On the panel to discuss the issue were economist Gurcharan Das; Executive Vice Chairman, Mercury Travels, Ashwini Kakkar; and Managing Partner, Counselage, Suhel Seth. The discussion was moderated by Sagarika Ghose.
Consolidation is the key
Finance Minister P Chidambaram says the fundamentals are strong as India is not as export-dependent as countries like China. So what sort of troubles can be foreseen?
Gurcharan Das said the fundamentals of economy are right and inflation is going to go down as commodity prices are going down. But he added that the RBI Governor will now have to put his money where his mouth is and start lowering interest rates.
“That would probably be the best thing we could do for growth, because ultimately India is a growth story and even though our growth may drop from about nine per cent to say about seven per cent, the drop is still painful for people,” he said.
He added that it is time for consolidation now but there will be some opportunities that entrepreneurs will find.
“There was a report today that a number of BPOs are expanding their enrolment because they foresee this crisis in the West as opportunities for more outsourcing of jobs. So it’s not a gloom and doom scenario for India as it is in the West,” Gurcharan added.
What happens to the yuppy culture
Indian economy is largely domestic driven where domestic consumption is 58 per cent of the country’s GDP. So even though we are not export driven like China, but there are projections of job cuts. In the light of that, has been a cultural shift limiting the young Indian yuppy from spending all his money on gadgets and travel?
Strongly contesting the fact that India is insulated from the global financial crisis, Suhel Seth said, “Chidambaram is the only person in the world who thinks India is not linked to the global economy. The fact that we went through the bloodbath that we did means we are.”
“Secondly, the stock market in India was fuelled to a large extent by FII money that was coming in. That FII money has vanished and will vanish. As for BPOs — let’s imagine what’s going to happen to them? Who are the largest clients of the BPO business? It’s companies in America, which are currently in the process of belt tightening. No one can say whether we should do that too. Nobody’s a soothsayer. The fact is that companies, in any case, should have had belt tightening as a process. You cant’ be big spenders on share holder’s money,” he said.
But if you’re paying your taxes and running honest businesses, why should you be apologetic about spending money.
“Compensation is different from reckless spending,” Suhel replied. “Compensation is what you need to offer to get the best and the brightest. What I’m saying is India needs to start worrying now. Our business fundamentals are strong but that doesn’t mean our stock market would continue to behave in the bullish manner it has behaved all this while, which is because we’re all indexed to the global economy. You can’t go to Davos and say India is a global economy and come back to Delhi and say no actually we’re not one,” he added.
So are our CEOs going to start travelling economy now?
Suhel responded, “That to my mind is tokenism which NR Narayana Murthy (Chief Mentor, Infosys) popularised by saying that you’re a simple person if you travel economy. The logic is that costs are a big issue because they are an important ingredient in determining the kind of margins you operate at, and all companies to operate at a certain basic margin. So it’s not all gloom and doom but I think we need to be careful and compassionate and be wary.”
No more luxury of self-indulgence?
The globalisation of the Indian traveller was something was seen over the last four years. The Indian traveller was going to as many far-flung places as possible. Indian traveller was being seen as a big spender. So is that going to change now?
Kakkar said that a lot depends on a slew of factors that are going to emerge over a period of time.
“The mood has become a little more sombre but festive season is certainly not the best season to discuss belt-tightening. If you look at the earn-and-burn generation, there is a lot more going on than just the belt tightening that you see signs of at the fringes,” he said.
However, Kakkar added that the crisis so far has been limited to the business-to-business environment.
“The crisis has still not fully hit the business-to--consumer level. When people realise that the value that they had in their banks has suddenly evaporated and when they realise that the value of their properties are not as high as they thought, that’s when the crisis is actually going to emerge,” Kakkar added.
Strongly challenging Kakkar’s argument, Suhel said, “I would imagine that the sub-prime crisis hit the average consumers. Talk to banks, auto loan providers, credit card companies in India — they are all seeing a consumer drag. Look at the stock market that’s come down intrinsic value for the normal investor. Everyone has lost value. Point is, when the banks are hit you’ve also got to worry what happens to their clients.”
Despite the economic slowdown, leading Indian corporates register an average of 14.8 per cent increase in their salaries. The cultural shift that has to be taken with this kind of economic transformation – even if it is short term – is the Indian middle class and the Indian rich ready for that?
Gurcharan said that it’s always sensible to live within one’s means. “For an economist, consumption is a good thing because you wouldn’t have investment unless somebody were consuming. One of the things that I think is very interesting about the Indian economy is that we are one of the highest consuming economies. Our ratio of consumption to GDP is amongst the highest in the world. I think sensible people are not going to sell when it’s low and buy when it’s high,” he said.
We all know that spending spurs growth, so does belt-tightening then mean reverting to Hindu rate of growth, going back to three per cent growth?
“Spending is equal to consumption is not necessarily the equation,” Suhel replied. “Affordable spending is what we need. Has the culture that we have inherited from the West, inculcated greed and avarice in us? We have become a consumptive economy and less conservative. It shows in our savings rates. I think it’s a great wake up call,” he added.
Kakkar said there are always two sides of the picture. “At one level, it’s cut in limits — whether it’s credit card limit or some other limit — on the other hand, the sale so luxury cars are continuing to grow. So in that sense, it’s a huge dichotomy between the middle and the affluent class.”
Gurcharan added that so far the reaction of the Indian government has been very measured and laudable in terms of economic reforms. “The steps they have taken reflect confidence in the system. This has been a perfect storm and you can’t still figure out how this has all happened and if you can’t do that, it will happen again,” he said.
Gurcharan concluded the show by saying that all this is a part of the ride and there will be ups and downs.
Final SMS/Web poll result: Is affluent India ready for belt tightening?
Yes: 65 per cent
No: 35 per cent
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