Churn, don’t curtail consumption

August 30th, 2012

It’s an interesting thought floated by a friend over lunch. As usual, we were discussing how India is floundering on everything, primary due to the so-called policy paralysis.

Everyone agreed that the government needed to do something to change things, and fast. The thrust of the conversation was that while everyone keeps harping about global problems impacting India, there is little we have done to address our own problems. But, then, what can be done? – Most of us were speechless, as except blaming the government, there were no answers.

Then one of us said – the solution lies in churn. What… churn? – An interesting discussion followed thereafter. Here’s what we journalists call the edited excerpts.

The argument is simple. Say, someone is selling a shirt for Rs 100. The profit: Rs 20. If he reduces the price to Rs 85 and sells two, his profit will increase to Rs 30. But two people would have bought those shirts because the pricing was attractive to a wider audience.

Extending the logic to other sectors, say a builder’s margin is 30 per cent on a property priced at Rs 50 lakh. If the same property is sold Rs 40 lakh, he will attract more buyers.

Importantly, those buyers will take a smaller loan to buy the flat leaving more disposable cash of around Rs 8,000 – Rs 10,000 in this case, in their hands. This is likely to lead to consumption of other goods, say even a car. The rest follows…more expenditure means more requirement of goods and services…more production and so on.

In the economic parlance, it is referred to as increasing the velocity of money and transactions, as more people participate in a competitive market leading to the economic well-being of a larger section of society. To quote Aamir Khan from Three Idiots… more people should say ‘Aal Izzz Well’.

But, many companies or builders are unwilling to take a cut on their margins. And the approach of squeezing the maximum out of a few is hampering growth by keeping potential buyers out of the market.  No wonder, most consumers think even discount sales are gimmicks. Imagine buying jeans for Rs 5,000 in a ‘sale’.

Recently, Analjit Singh, non-executive chairman of Vodafone was explaining that the approach that governments abroad have is quite different. Globally, governments ask companies to focus to top line growth, bottom line growth will automatically take place – something, we don’t focus on aggressively.

How to increase the churn? –Finance Minister P Chidambaram seems to have taken the first step by asking banks (reportedly) to put pressure on builders to cut property rates to encourage buyers. This action needs to be extended to many other sectors.

The builder community is in deep trouble because they have been unable to sell flats and repay banks. And they are finding it hard to sell because they are holding on to prices through help from investors and refinancing from private equity players, venture capitals and even same banks (sometimes, at mind boggling rates of 30 per cent a year). So, instead of selling property, they are busy servicing debt.

Till recently, banks used to charge a prepayment penalty to retail borrowers if they shifted to another bank and ‘did not pay from their own funds’ – a practice both RBI and NHB have stopped now. Why can’t the same logic of ‘refinancing through own funds or a penalty’  extended to corporate India? This will put pressure on them to deliver.

Banks hold the key here. Aggression on their part will help the economy. It will even help improve their books. Who will bell the cat?, don’t curtail consumption digg:Churn, don’t curtail consumption newsvine:Churn, don’t curtail consumption reddit:Churn, don’t curtail consumption Y!:Churn, don’t curtail consumption