Champions of India's hot business sectors struggle to remain sustainable

If costs are twice revenue, the story from the perspective of national accounting is of value destruction, writes T N Ninan

Every decade has seen Indian business throw up new success stories—champion sectors, as it were. Which are the champion sectors now? Three obvious candidates are aviation, telecom and the ecommerce/digital businesses. But here’s the paradox: almost no one is making money in any of these businesses. The aviation sector, for instance, has been growing at a handsome 20 per cent clip for some years, prompting predictions that India will become the third-largest aviation market in less than a decade, from being sixth or seventh today. But here’s the thing: Indigo, the largest airline with a near-40 per cent share of the market, has reported large losses in the latest quarter, following slimming margins in previous quarters. Its nearest rival, Jet, is unable to pay its bills and seems headed for the block--if it can find buyers. As for Air India, the less said the better.

The picture is only marginally different when it comes to telecom, which too has been reporting massive growth. Reliance’s Jio has been setting the pace since its launch. Its chief rival Airtel—while clearly under margin pressure—reported data traffic volume growth of 350 per cent in the June quarter, and voice traffic growth of 62 per cent. But unit tariffs have crashed and the company shows poor returns on capital, even as it is weighed down by debt. Vodafone and Idea have been forced to merge, in order to stay alive. Everyone else has dropped out after suffering huge losses.

The question is, how can these current champion sectors sustain their growth without profits to finance further growth? Of all the players in the two sectors, only Reliance has the money to keep investing because of profits from its refinery and petrochemical businesses. Indigo, though slipping into the red, still has a cash hoard. Both companies could play for greater dominance, rather than maximising returns—imitating companies in the ecommerce and other digital businesses that are deep in the red, but early enough in the growth cycle to be able to raise fresh capital that fuels continued growth. But if costs are twice revenue, as is the case with some of the new digital/ecommerce businesses, the story from the perspective of national accounting is of value destruction. The market valuation game tells it differently but, unless cash has ceased to be king, the issue is the same in all three sectors: sustainability.

This is a change from the past, which produced new champion sectors that were also profitable. Most of those past champions continue to grow, but have slowed to a sedate pace. The tech companies took off over the turn of the century but have slowed as the business model undergoes change. The telecom business did outstandingly well, but again there is a game-changer in the picture. The automobile industry’s growth has been sustained, in both two-wheelers and passenger vehicles, but it faces a slowdown because of possible disruptions in the flow of credit, or its higher cost.

Pharmaceuticals had a good decade in the new century, but are not flag-bearers any more. That goes for construction too, as the housing market has slumped and housing finance companies face a liquidity problem. Infrastructure has become problematic, and debt-laden. The power generation sector attracted major investment but many unviable or shut power plants dot the map. In many growth sectors of old, the champions are focused on paying down debt. Inevitably the financial sector, once a powerhouse, has been crisis-ridden from about 2015, when the bad-loan issue surfaced. Meanwhile, the consumer-oriented sectors have seen steady but unspectacular growth. Exports once turbo-charged growth, but not now.

Over-all, the private sector continues to make good money—its surpluses in relation to GDP have continued to grow. However, the share of investment in GDP has declined. In five years, the gap between investment and savings by the private corporate sector has dropped dramatically from 17.5 per cent of GDP to 10 per cent. That points to gorging on debt in the past, and indigestion now.