Economic Highlights
New Delhi, 13 March 2023
SVB Ruin May Hit India
RISING COSTS CUT FIRM PROFITS
By Shivaji Sarkar
Amid changing global scenario, companies facing complex
situation of weakness in people’s consumption and contraction in operating
profit, the US Silicon Valley Bank (SVB) collapse sparks a graver financial
crisis. The banks known for supporting start-ups hint at a new unseen future.
Does it mean a serious churning for the start-ups?
The SVB has given jitters to India as well. It has
supported 20 Indian ventures since 2003. The stock market that was slowly
recovering has got severe jitters with 900-point loss. The US banks see severe
losses. It has exposed the extreme fragility of the world financial sector led
by the private companies and many previous instances, like the Lehman, or
Satyam, manipulating balance sheets.
The SVB had been providing finances through SVB India
company. It was providing debt capital to domestic high growth companies, which
are now pulling out their money from SVB. The bank employs 800 people. Though
Indian exposure to the SVB is low, as it is hitting the financial market, India
may have problems not so much for operational reasons but the overall impact on
the international market.
The hit taken may accentuate the fund flow, which the Reserve
Bank of India has just started feeling comfortable. How it would hit the global
situation already in a tizzy due to the Ukraine war remains to be seen.
The SVB has hit at a time when the country has been
struggling to come out of lower growth at 4.4 per cent in December quarter 2022.
The RBI finds that sales of listed private companies record 22.6 per cent
growth in 2022-23 as compared to 41 per cent in the previous quarter and 31.8
in the second quarter.
Operating profit of private manufacturing units’ contract
though it expands for IT and services companies, says the RBI. The inflation
adjusted sales are losing growth as per analysis of NSO data. The sales
increased by 9 per cent in December 2022 against higher volumes at 40.6 per cent
in June and 20.6 per cent in September. Overall contraction was 1.9 per cent in
December and 2.4 per cent in September.
The balance of risks, says RBI, is
increasingly tilted towards global outlook and emerging market economies (EMEs)
appear to be more vulnerable, even though incoming data suggest that global
inflation may have peaked. The near-term growth outlook for the Indian economy
is supported by domestic drivers as reflected in trends in high frequency
indicators. Waning input cost pressures, still buoyant corporate sales and
turn-up in investments in fixed assets are heralding the beginning of an upturn
in the capex cycle in India which it expected to contribute to a speeding up of
growth momentum in the Indian economy. A moderation in the wake of SVB may not
be ruled out.
Only the IT companies have shown better
profits. Manufacturing
companies’ expenditure on raw materials surged by 27.8 per cent on an annual
basis has been experiencing moderation, as measured by the ratio of raw
material expenditure to sales, are higher than a year ago. The SVB may hit fund
flow and have impact on prices.
The companies with over Rs 500 crore turnover have
shown annual growth in sales. The most critical were the companies with sales
of Rs 10 crore or less. These companies have suffered continuous sales drop for
six consecutive quarters. The SVB scenario may add to the problem.
In the RBI’s views inflation remains a worry. Inflation
may be slightly down, but it is certainly not out. If anything, it has
broadened and become stubborn, especially at its core. An unease hangs over
energy prices despite cheaper Russian crude.
Despite moderation in global commodity markets, climate
change and the war in Ukraine are set to keep food prices at higher than
pre-pandemic levels. Central banks may have moderated the pace of monetary
policy tightening or hinted at it, but they are in no mood to ease off in their
fight against inflation. Disinflation is about to become painful. Financial
conditions, and especially borrowing costs, are biting into discretionary
consumer spending and housing demand, and stalling investment in new capacity
creation.
It is reflected in 22.9 per cent shrinking of
profits in the December quarter, for three quarters in a row. Costs grew faster
than revenues earned from sales, which was 3.7 per cent in September and 1.5
per cent in December. This indicates that cost increases further accentuates
sales performance. The CMIE figures show that raw material prices, which
account for 62 per cent of the total are not easing. Cost input increase came
down to 10.9 percent from 32.7 per cent in but still it is considered high. It
has remained higher than the wage rises of 6.3 per cent. Though that has
another impact on the economy. As costs rise and wages stagnate, it reduces
affordability leading to lower sales.
Wage growth has been low with almost all kinds of
companies. As SVB may put many people out of job, it can impact all. Stagnation
of wages and costs are inverse. If wages do not rise this can impact growth and
new job prospects. This is not considered favourable for future growth amid demand
slump.
The RBI is hopeful but has worries. Higher
inflation in rural areas is muting spending activities. Industry is having
uneven recovery and exports are hit by global slowdown. Better capital flows
give hopes for a better future if the SVB does not have larger footprint. Weaker global growth, fraught with SVB
type risks, is probability. Inflation may come down in India but it would
remain well above targets in most economies.
The SVB crisis may increase inflation with rising finance
costs along with geopolitical risks. India, RBI says, has resilience. Overall
domestic conditions are conducive for a turnaround in private investment, and
if inflation ebbs, private consumption will firm up.
There is a growing sense that the coming decade will mark
India’s ascent on to the world stage. It is in this context that India’s
priorities and deliverables under its G20 presidency assume relevance.
Reinvigoration of global policy cooperation to meet emerging challenges, has to
be priority in repairing the multiple fractures to put the global economy on a
trajectory that fulfils the G20’s mandate of strong, sustainable, balanced and
inclusive growth. ---INFA
(Copyright, India News & Feature
Alliance)
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