Friday, December 26, 2008

The current economic scenario and its impact on the services sector

This is an article, that I intended to publish in a magazine, but simultaneously putting it in my blog. it contains the list of all industries that constitute the services sector and the impact of the economic recession on them

Layoffs, Deflation, Unemployment, Reduced Growth rates, Poverty and the list go on. Needless to say, the current economic scenario is a tough time for all the players involved in the system. Services sector contributes close to 60% of our annual GDP and hence the impact on this could mark a death knell to the high growth rates of our country. Impact assessment of service sector includes the assessment on all of its disparate activities; a macro level analysis is done on the same with emphasis on some of the major ones.

1.Trade: Need less to say, with the burgeoning crisis is because of the decreased trade amongst the various business entities. The recession in the developed world has reduced the exports. Companies and banks are not willing to extend credit to each other making trade much tougher. Though the crude prices have gone down, the domestic consumer hasn’t yet received those benefits, but the government is able to take a breather due to the reduction in the overall subsidy bill. The continued escalations with neighbouring countries, the lurking pirates in the international waters and the reduction in the commodity prices across the globe have lead to the decline in trade in multiple forms. Only a concerted effort by government to boost the infrastructure can boost to the services sector.
Domestic trade has also taken a hit because of the reduced consumption by people. The customers are benefited because of the reduction in the commodity prices, but the other players in the value chain had to bear the brunt of the sudden decline in prices because of the various hedging activities performed in Commodity market.
Hawkers can see an increase in their trade since the major retail chains which operate in massive scales and credit patterns are severely affected due to the unavailability of credit.
India is in a better position when compared to the other countries because of the heavy domestic consumption. But slowly the recession is trickling down into the economy and this may lead to a decrease in the domestic consumption as well, unless Government takes active steps to boost the confidence of the consumer and the industry.

2.Hotels and restaurants: The Mumbai blasts have done anything but good to the already suffering Hotels and restaurants industry. Frequent travellers including businessmen and tourists form a major chunk of hotel industry, and the reduction in trade has reduced the travel amongst the businessmen and hence reduced occupancy rates in hotels. The increased terrorist activities have ensured that the number of tourists to India have reduced and hence further reduction in the business to hotels.
In the past couple of years, there has been an increase in the domestic tourism activities, but the uncertainties in the job opportunities have also reduced the domestic tourism and hence a loss to the hotel and restaurant industry. With people spending lesser money, restaurants are facing a huge reduction in the number of people/families opting for dining outside their home.
The impact on the restaurants is going to be felt much more for the premium ones due to the above mentioned reasons. The restaurants that offer non-premium services may have more business with more people opting for less costlier services. As long as the quality of the good is maintained the non-premium hotels can have a business that can take them through the recessionary times.

3.Transport including tourist assistance activities as well as activities of travel agencies and tour operators: The recession has lead the airlines to huge cost cutting measures including drastic pay cuts, lay offs, lesser routes and fleet size just to stay afloat and the expansion plans of almost all the airlines are frozen. Though the decline in ATF prices has reduced the burden, the decrease in consumer expenditure has thwarted any hopes of revival.
Airline agents are going to see huge lay offs, since airlines have stopped giving commissions to their agents and hence the fares have to be extended to the passengers and the consumers are not willing to pay an extra dime for no additional value that they can foresee.
During this recession Railways can see a huge increase in the passenger traffic and reduction in the freight traffic and hence one can witness a pause in their high growth periods. The huge cash reserves that Railways have accumulated over the past 4-5 years can help them meet all their operational expenses and flourish even during these turbulent times. Further investment in the dedicated freight corridors and other activities by Railways can boost the employment and increase consumption of people.
Roadways can also witness an increase in the traffic, but better governance and regulation can alone ease the woes of the. People will prefer public transport and hence more options need to be provided to them to ensure that the business activities do not lose a great momentum.
With a majority of population in India willing to pursue the religious tourism, tour operators performing that business can remain profitable. But there can be a drastic decrease in the operators concentrating on international passengers and destinations. The focus during these times needs to be inwards and tap the potential of domestic tourism to identify more revenue opportunities.

4.Storage and communication: The telecom penetration in India is still low and hence there will be continued demand for communication channels though at a decreased growth rate. Focus will be on providing more value added, low cost and low priced services. The incentive for telecom operators to aggressively pursue the high-end applications may decrease and hence there can be a decline in the investment strategies of these companies. So far the telecom industry hasn’t seen the brunt and with caution they can continue their growth momentum.
Internet penetration will provide further services and at the same time traditional communication channels like radio, news paper and television which cater to mass audience will continue to grow since they offer services at a very low price.
Online services which also include storage and other forms of communication will have more demand, but people will not be ready to pay the premium. Hence companies will be forced to provide more services at a lesser price to sustain the times.

5.Banking and insurance: These services had to face the worst impact. Most of the jobs in this domain are on doldrums and huge reduction in pay packets, lay offs and a cease in fresh recruitments have become the norms to avoid extinction. Nevertheless, government has been to improve the situation through stimulus packages, because any activity which needs capital disbursement can only be initiated by reviving these two sectors. Though the US recession is going to take its toll, major government initiatives can bail out these sectors from further collapse.

6.Real estate and ownership of dwellings: One of the worst affected areas and it will be a Herculean task to revive this sector. There is almost a freeze on new construction and the realty prices have come down drastically and hence there is also a decrease in the employment opportunities. Though the decline in steel, cement & demand prices have reduced the price of new apartments, the reluctance of the consumer to purchase apartments is not helping the situation. Interestingly the rental values of houses have increased in metros like Mumbai because people are willing to pay rent than purchase. The further decline in interest rates can probably help this sector but more growth rates can be achieved only when the global meltdown eases out.

7.Business services including accounting; software development; data processing services; business and management consultancy; architectural, engineering and other technical consultancy; advertisement and other business services: These were the major contributors to the employment creation for the past decade and are affected by the global phenomenon. Many of the services which started as back office operations are slowly grabbing the attention of their clients for providing the complete solutions. Though these services are going to take a hit in the short run, this is a major opportunity for them to grab the contracts and expand their operation base.

8.Public administration and defence: The expenditure in this area keeps increasing during all eras, and it remains a priority sector for India and hence will not be affected. In the wake of terrorist activities, one can expect further increase in defence and hence reduction in the budget allocation for other sectors including public administration.

9.Other services including education, medical and health, religious and other community services, legal services, recreation and entertainment services, personal services and activities of extra-territorial organizations and bodies: Because of lack of funds the growth targets for these basic services may not be achieved, but government intervention is going to play a crucial role in ensuring that some of these basic amenities are provided to the general population.


Monday, December 01, 2008

Neighbour's envy owner's pride

Suddenly the transformation in the Pakistan military and the militants in its country is quite unexpected and a welcome news for that country.

Post Mumbai blasts, the major militant groups in the western and the southern provinces of Pakistan have offered a cease fire to Pakistan Military. And guess what, Pakistan Military seems to be inclined towards it, and hailed some of the most wanted of those "militants" as Patriots.

Before the blasts all these people remained the main accused in the assassination of the Benajir Bhutto, x-prime minister of Pakistan. And all the militants who were accusing Pakistan military for their alliance with USA have suddenly extended their solidarity to the same military and also are shovering the military with praises saying that it is very patriotic.

The sudden act of comradery can be perceived as an indication that one of the parties played a major role in the Mumbai blasts and the other party is appreciative of that effort.

These are interesting developments and can certainly give some stability into the chaotic systems surrounding the western borders of Pakistan. Unless India acts in a quick and concrete manner, the future of the India-Pakistan relations seem quite bleak and are in for heavy winds going forward.