Policy Watch: Under a cloud again?

POLICY WATCH
Under A Cloud Again?

Some indicators are pointing to an industrial slowdown. But there's reason to believe that this is temporary and limited to certain sectors.

By Seetha and Ashish Gupta

For India Inc., it was a rude wake-up call. Make that two. First, the Central Statistical Organisation's (CSO) quick estimates of the Index of Industrial Production (IIP) showed that industrial growth in April-June, 2000, had slipped to 5.4 per cent compared to 5.7 per cent in April-June, 1999. The manufacturing sector, whose weight in the index is a hefty 80 per cent, grew only 5.5 per cent during this period against the 6.7 per cent growth it logged last year.

Next came the quarterly Industry Monitor of the Associations Council (ASCON) of the Confederation of Indian Industry (CII). The survey of 115 industry sectors showed that the number of sectors logging excellent (above 20 per cent) and high (between 10 and 20 per cent) growth had fallen from 61 in the first quarter of 1999-2000 to 48 in the corresponding period of 2000-2001. In contrast, the number of sectors showing low (between 0 and 10 per cent) and negative growth had increased from 59 to 67 in the same period.

No wonder, then, that the National Council of Applied Economic Research's (NCAER) quarterly Business Expectations Survey noted a dip in the business confidence index (BCI), from 122 in April to 118.2 in July.

So, is it time for Corporate India to wake up and smell the coffee? Yes, says Ajay S. Shriram, Vice-President and Managing Director of DCM Shriram Consolidated Ltd. Asserts Sriram, 46: ''There is a definite sign of a slowdown. The buoyancy of the last six-to-eight months is missing.'' He's not sure about the second-quarter results being more positive. Agrees Dilip Chenoy, 41, senior director, CII: ''In the absence of capital investment and sustained economic demand, the growth rate may not pick up in the second or third quarters too.''

Not everyone shares this pessimism. Says D.H. Pai Panandikar, 67, Director, RPG Foundation: ''Right now, there is not enough evidence to believe that we are moving into an industrial slowdown.'' Insists S.L. Rao, 64, chairman, Central Electricity Regulatory Commission: ''Industrial production is better set than it was two months back.''

Accusing fingers are being pointed at the CSO's methodology. Quick estimates are revised each month on the basis of updated production figures. In June, the CSO scaled down the industrial growth figures for April, 2000, from a robust 12.2 per cent to 5.7 per cent. The growth rate for the manufacturing sector was likewise revised from 14 per cent to 6 per cent.

Suspect Statistics

Industry was quick to cry foul. Revision of quick estimates are routine, the Associated Chambers of Commerce and Industry (ASSOCHAM) pointed out, but never before had it been this drastic. Points out Pyaralal Raghavan, 42, Senior Economist, ASSOCHAM: ''The difference between the quick and the revised estimates throughout 1999-2000 has never been more than one per cent. How can the difference be so sharp in one month alone?''

What caused more concern was the steep downward revision of the index for the intermediate goods sector, from 21.2 per cent to 4.5 per cent, which pulled the manufacturing index down. The fortunes of the intermediate sector are directly linked to those of the capital goods and consumer goods industries. ''How could the intermediate sector do so badly when both the sectors for which it provides inputs had improved their performance over the past several months?'' asks Raghavan. From a minus 6.5 per cent growth in January, 2000, the capital goods sector clocked a 3.5 per cent growth in April. The consumer goods sector too registered an increase in growth-from 6 per cent to 7.5 per cent in the same period.

The CSO, however, throws the ball right back. Thunders N.S. Shastri, 59, Director-General: ''There has been no error on our part. Instead of criticising us, industry associations must get their members to provide data on time.'' Unfortunately, even government economists aren't convinced by these arguments. Says one: ''It's both a reporting problem and a methodological issue.''

The other indicators

Indeed, most other indicators show the economy isn't doing too badly. Take exports, which posted a double-digit growth of 11.5 per cent in 1999-2000 and continued to grow at 30 per cent in April and May. With the manufacturing sector accounting for 80 per cent of exports, such robust growth can hardly be an indicator of falling industrial growth.

Or take excise collection, which is growing at a steady clip. Points out Advisor, Planning Commission, Pronab Sen, 48: ''Excise collection is a reasonably good indicator of industrial production, unless there is reason to believe that there are huge carryover inventories.'' The NCAER survey, in fact, shows that average inventory levels for the manufacturing sector has decreased.

This doesn't mean that everything is hunky-dory. After all, even after discounting for statistical aberrations, industrial growth is more subdued compared to the previous fiscal. But economists aren't reading too much into this, and attribute it to the bottoming out of high growth rates in the previous year. In fact, a close look at the CII-ASCON survey shows that several sectors which logged low and negative growth in the first-quarter of this fiscal had abnormally high growth rates in the corresponding period of the last fiscal. The auto components and cement industries, for example, had both grown 30 per cent in the first-quarter of 1999-2000. This year auto components grew only 10 per cent, and cement, 4.1 per cent. Agrees S. Bhide, 45, Director, NCAER: ''It isn't possible to maintain such high growth rates.''

Investment climate

That could also detract from the feel-good factor (apart from the numbers) is the investment climate, thanks to a bearish stock market and high interest rates. Industrialists are quick to second that. Says R.V. Kanoria, 45, Vice-Chairman and Managing Director of Kanoria Chemicals and Industries: ''Industry is finding it difficult to raise money from the capital markets. And borrowing from the banks and institutions doesn't seem to be a good business proposition.'' Bhide agrees that investment expenditure is a problem, but attributes it more to short-term factors like capital market volatility and uncertainty over interest rates.

There's another reason to believe that the so-called slowdown may be a mere blip. Corporate India has seen several mergers and acquisitions and restructuring exercises over the past year. According to Amit Mitra, 52, Secretary-General, Federation of Indian Chambers of Commerce and Industry (FICCI), this has resulted in an industrial pause.

That's why he confidently says: ''There is no wider industrial slowdown. Specific sectors may have been affected for specific reasons.''

Take the automobile sector, where the decline is sharp, with the medium and heavy commercial vehicles taking the brunt. Rationalisation of sales tax by states before moving towards a uniform value-added tax system has pushed up truck prices by as much as Rs 12,000 to Rs 15,000 per truck.

What's more, fleet utilisation by transporters has improved. Both these factors, says Deepak Dhawan, 47, executive director (Strategic Planning), Eicher Goodearth, has resulted in less demand. Eicher itself hasn't felt the pinch and rolled out 36 per cent more trucks in the first-quarter of 2000-01 than in the first-quarter of 1999-2000 .

Even the tractor industry isn't too worried although the sector is in the doldrums, with zero growth rate in 1999-2000. Escorts Ltd's tractor division is planning to cut its production by 5,000 in the first six months. Says Rakesh Chopra, 50, Business Head, agri-machinery group says this is due to a combination of factors like the drought, the glut in potato production, and a poor soyabean crop. But he's confident the tide will turn thanks to a good monsoon and bumper crops. Says Chopra: ''I expect only a 5 per cent drop in production this year.''

Those most anxious about the performance of the medium and heavy commercial vehicles sector are the auto component manufacturers who didn't have a delivery schedule for August. Says V.K. Mehta, 59, President, Automotive Components Manufacturers Association: ''If vehicle production doesn't pick up, we won't even touch last year's figures.''

ASSOCHAM may not be losing any sleep over the intermediate goods sector, but manufacturers are a worried lot. Says Kanoria: ''We are going through a rough patch. Our margins are getting squeezed because of cheap imports.'' Large volumes of imported pentaerythiritol, used in the manufacture of paints, has shrunk Kanoria Chemicals' sales realisations in 1999-2000 by Rs 15 crore. Shriram too laments that global competition is affecting profits: ''The end-user industries put pressure on us to cut prices.''

Clearly, there's the efficiency issue involved. Agrees Bhide: ''The fundamentals in terms of demand are okay; in terms of competitiveness, I'm not so certain.'' The slowdown, if views like his are to be believed, isn't driven by lack of consumer demand. That should be sweet music to India Inc.'s ears.

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