SVB ruin may hit India, rising costs cut firm profits

Amid changing global scenario companies facing complex situation of weakness in people’s consumption and contraction in operating profit, the US Silicon Valley Bank 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. 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 RBI 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 percent in December quarter 2022. The RBI finds that sales of listed private companies record 22.6 percent growth in 2022-23 as compared to 41 percent 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 percent in December 2022 against higher volumes at 40.6 percent in June and 20.6 percent in September. Overall contraction was 1.9 percent in December and 2.4 percent 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 nearterm 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 percent 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 percent in September and 1.5 percent in December. This indicates that cost increases further accentuates sales performance. The CMIE figures show that raw material prices, which account for 62 percent of the total are not easing. Cost input increase came down to 10.9 percent from 32.7 percent in but still it is considered high. It has remained higher than the wage rises of 6.3 percent. 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.