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Wednesday, 7 November, 2001, 09:41 GMT
Gloom mounts amongst Indian businesses
Ford production line, India
Indian manufacturers are facing increased competition
By Sanjeev Srivastava in Bombay

Business confidence in India has fallen to a new two-year low for the three months to October, according to a survey conducted by the national council for applied economic research.

The worst hit is industrial output which has crashed to a five year low because of sluggish demand growth.

But the bad news does not end here.

According to the survey, a quarterly study of Indian businesses across different sectors, an early recovery appears unlikely as consumer spending is down.

According to Mr. Anjan Roy, economic advisor to the Federation of Indian Chamber of Commerce and industry (FICCI), it is the atmosphere of uncertainty in the region which is dampening the sentiment.

Plunging exports

"There is a conflict in the region and one does not know when the war may escalate. Its hardly a situation which inspires consumer confidence and triggers investments," he said.

Street cobbler India
All sectors of the economy are affected
The global downturn is also affecting Indian exports, which grew 20% last year. In the three months ending in October exports have registered a negative growth of just 2% .

And Just about every export sector is taking a hit.

Christmas jewels

India's largest foreign exchange earner is the gem and jewellery trade and they get maximum orders from the west at this time of the year for Christmas shopping.

A global recession has meant less than half the usual demand this year.

The same is true in other export sectors as well, be it textiles, leather products or engineering goods.

In fact, Indian industry has been hit from both sides.

Chinese competition

With trade barriers getting lifted, Indian manufacturers are now also facing increased competition from cheaper, and in most cases, superior quality-imports from countries like China.

"There is virtually international competition now in the domestic market place," Mr Roy told BBC News Online.

The flow of imports have forced many Indian manufacturers to follow the dictum of - if you can't beat them, join them.

Re-branding imported goods

The result is that some Indian manufacturers of electrical appliances like fans are importing goods from China and selling it under their brand name in local markets.

While such a strategy may boost their bottom line short term, its long term impact can only be detrimental to their product range and brand equity.

And such measures render a large number of workers jobless in a country where nearly 15% of the population is either unemployed or underemployed.

Going solo

However, there are many who view India's comparative isolation from the world economy as a saving grace in such times.

The Indian finance minister, Mr. Yashwant Sinha, told the BBC during the course of a recent interview that a large domestic market saves the country's economy from plunging into a recession in a difficult international environment.

"Imagine our plight if exports accounted for 30% of India's GDP instead of the present 10%.

It is in times like these that India is saved by the fact that its economy is not much integrated with the rest of the world," he said.

Rural economy hopes

It is because of this large domestic market and the fact that India still remains a largely rural, agriculture based economy that the country's central bank has predicted a growth rate of around 5.5% on the back of a good monsoon this year.

Already some sectors are showing signs of a tentative turnaround on the back of increased rural demand and more money in the pocket of farmers.

Two of India's main auto makers- Bajaj Auto and Hero Honda - have posted a handsome rise in sales and profit numbers for October.

Sale of motorbikes - preferred more in rural areas both because of their rugged looks and the rough terrain in Indian countryside - have shot up by more than 40% in October.

So have the sale of colour TV sets. The colour TV market has shown a growth of 16% this year largely on the back of rural demand as people living in small towns and villages continue to discard the cheaper and old black and white TV sets.

In contrast, TV sales have grown by a much more modest 5% in urban areas.

Staying afloat

Sales numbers from consumer goods companies like Hindustan Lever, Colgate and Nestle have also continued to show a decent growth rate indicating that a good monsoon and more purchasing power in the countryside is saving the day for them.

But analysts say rural demand is only sufficient to keep the economy afloat.

For things to really look up its necessary for the services and exports sectors to do well as they provide the much needed feel good factor to any economy.

Luxury purchases

For a buoyant economy, consumers need to spend on luxury goods and not just on the essentials.

And for that to happen, the Indian earning in dollars needs to have his fund flow coming in and pushing up the sales of luxury cars and the occupancy rate of super deluxe five star hotels.

In volume terms, the money spent by these dollar-earning Indians may not be huge, but their spending has a positive spin off effect which goes a long way in boosting demand and consumer confidence.

See also:

25 Sep 01 | Business
India's car giant slashes workforce
04 Oct 01 | Business
Indian economy smarts under crisis
08 Oct 01 | South Asia
India says WTO package offers little
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