The current slowdown could be a temporary blip if infrastructure investments are stepped up.

By  Seetha

Two days after international rating agency Standard & Poor's downgraded its outlook on the long-term foreign currency issuer credit rating from positive to stable, finance ministry officials were busy calling journalists. They had received a letter from Moody's Investor Service and they wanted to read out extracts. The gist of the letter: Moody's plans to maintain its positive outlook on India.

But then damage control doesn't lift spirits. For there are enough signs that the party is ebbing over for Corporate India. First quarter (q1) 2000-01 figures on Gross Domestic Product growth (GDP) show the economy grew at only 5.8 per cent, down from 6.1 per cent in q1 1999-2000.

For India Inc. this was only an official confirmation of what it had been saying for several months. Signs of trouble have been there for some time (See BT August 22, 2000). Industrial production is slipping and inflation rising, as are international prices of oil. The rupee is headed south, and the stockmarket isn't exactly full of beans.

The mid-term appraisal of the Ninth Plan (1997-2002) only brought more bad news. The average annual growth rate for the first three years was 6.1 per cent against the target of 6.5 per cent, with both the agriculture and manufacturing sectors lagging way behind.

The reactions were swift. Close on the heels of the Standard & Poor's downgrade, both the Reserve Bank of India (RBI) and the Centre for Monitoring Indian Economy (CMIE), scaled down their earlier forecasts for GDP growth in this fiscal: the RBI from 6.5 per cent to between 6 and 6.5 per cent, and the CMIE from an upbeat 7 per cent to a glum 5.8 per cent.

Don't Panic

Says a Planning Commission economist: ''It's quite clear, there is a slowdown.'' Those words are echoed by sundry economists and reverberate across corporate boardrooms. But hope springs eternal in North Block. Soothes Secretary (Economic Affairs), E.A.S. Sarma: ''There is no need to panic.'' He wouldn't like to go by first-quarter figures alone, preferring, instead, to wait for another month or two. His caution is shared by American Express' economist Arjun B. Mittal, who points out that GDP numbers have been prone to upward revisions at later dates.

India Inc. isn't buying that. Asserts Chief Economist, Gujarat Ambuja Cement, Kiran Nanda: ''This slowdown will last.'' That's because investments are just not taking place. Not a single company polled by the Federation of Indian Chambers of Commerce and Industry (FICCI) ahead of a meeting with Finance Minister Yashwant Sinha planned to make fresh investments in the near future. The little that has been invested is confined to improving existing plants.

That's not a recent phenomenon. The mid-term appraisal of the Plan showed a 5 per cent shortfall in domestic investment, with public investment falling short of target by 23 per cent. Yogendra Singh, Analyst, First Global Stockbroking, points out that the basic stimulus to growth is coming from consumption rather than investment. Between 1994-95 and 1998-99, the contribution of gross investment to GDP growth was 34 per cent, while consumption expenditure accounted for 68.7 per cent.

Buttressing the argument, S.L. Rao, economist and Chairman of the Central Electricity Regulatory Commission, says that the industrial recovery after the recession of 1996-1998 was partial and confined to the consumer durables sector. Indeed, production and import of capital goods, which indicate the robustness of industry, have been at sub-zero levels for several months now and whatever little growth there is in the manufacturing sector is being fuelled largely by the consumer goods sector. That's not exactly the recipe for sustainable growth.

Vulnerable Bottomlines

The investment climate has been depressed because of the high cost of both inputs and capital and the lack of operational flexibility. The rupee's depreciation and the oil price hikes are expected to only increase corporate vulnerability. For, even as cost pressures are building up, cut-throat competition is limiting productivity gains as well as price increases. ''All this will dent profitability,'' asserts S.S. Bhandare, Economic Advisor, Tata Services.

Take the steel industry, where growth is down to 9.10 per cent in April-August 2000, from 12.11 per cent in April-August 1999. Neither Steel Authority of India Ltd. (SAIL) nor Tata Iron and Steel Company (TISCO) are cutting down production just yet but latest figures with the Joint Plan Committee, the planning wing of the steel ministry, shows that the rate of consumption of steel products has fallen below production levels over the past two months. Inventories are piling up and may depress prices, which have already fallen. Hot-rolled coils prices have plunged by Rs 1,000 a tonne. The export market, which steel manufacturers had been tapping, is no longer promising, thanks to low global prices.

Look also at cement, another ailing sector. Finance ministry officials assure that a 50 per cent increase in disbursements by 29 large housing finance institutions in the first half of this year shows that cement demand will pick up. That doesn't console Narottam Sekhsaria, Chief Executive Officer of Gujarat Ambuja Cement, who laments that though his firm has clocked a 7 per cent increase in output since April, price realisations have remained static. ''For investments to remain viable, they must get the right price,'' Sekhsaria argues.

It's the same story in the consumer goods sector where growth is being driven by sharp price reductions, according to CMIE Executive Director Mahesh Vyas. Competitive pressures are forcing companies to offer a host of freebies, ranging from a free CD player with a Rs 6 lakh luxury car or a pencil with a Rs 12 cockroach repellent. Television manufacturers, reeling under negative growth, have extended the credit period for their dealers from 15 days to over a month.

Falling Demand

What's worrying is that in a consumption-led growth scenario, consumer demand is also falling. A 1.9 per cent drop in agricultural production last year meant a fall in rural incomes and, consequently, rural demand. Incremental rural incomes in 1999-2000 were Rs 25,000 crore against Rs 80,000 crore in 1998-99. The rural market is estimated to account for nearly half the total demand, and a range of industries have been hit. The tractor industry, for example, posted a negative growth of 17 per cent in q1 2000-01 and manufacturers have increased the credit period for dealers from one month to four months.

The psychological effect of erosion of share values on the stockmarket, rising inflation, and increase in oil prices have also depressed buying sentiment. No wonder growth in the consumer non-durables segment, which accounts for 80 per cent of the consumer goods sector, has been sluggish. Warns D.H. Pai Panandikar, Director, RPG Foundation: ''There are no good prospects for industry.''

The automobile sector, where growth has turned negative after an extraordinarily high growth last year, would probably agree. Transportation costs have gone up and manufacturers say they cannot pass this on to the consumers. Maruti Udyog's sales grew only 2 per cent in April-September, 2000, and Managing Director Jagdish Khattar says: ''We will be lucky if we can achieve the 40 per cent growth we had in the corresponding period of the last fiscal.'' Heavy commercial vehicle manufacturer Ashok Leyland is protecting bottomlines by shifting its focus from trucks to the private passenger market.

White goods manufacturers aren't ready to write off the entire year yet. K.S. Kim, Managing Director, Samsung India, points out that 60 per cent of consumer electronics sales happen in the second half of the year. Samsung itself has bucked the downward trend. Its CTV sales rose 20 per cent in January-September, 2000, while its home appliance division nearly doubled. But President of the Consumer Electronics and Television Manufacturers Association, Rajeev Karwal, is worried because sales during the marriage season in the north, normally a period of high growth, were not very good this year.

Fortunately, the infotech boom has kept the computer hardware sector on a roll, with Compaq Computer, HCL Infosystems, and Hewlett Packard posting good growth. Says Pallab Talukdar, Director, Compaq Computer India: ''New opportunities are coming up and a lot of purchases are being made.''

There are other pieces which don't quite fit into the gloomy picture. Both exports and non-food credit have been showing robust growth, in sharp contrast to 1995, when they had slumped. But the credit for the export surge goes to a booming world economy. As for non-food credit, there's more to it than meets the eye. The Associated Chambers of Commerce and Industry (ASSOCHAM) points to a significant drop in the share of funds going to infrastructure and industry. Bank funding of infrastructure investment fell from Rs 2,782 crore in 1998-99 to Rs 1,298 crore in 1999-2000. Similarly, industry's share in additional gross bank credit fell from 43 per cent to 34.2 per cent in the same period. Where then is the money going? To the oil companies, which are frequently accessing the market for working capital, says Singh.

Hardly anyone is expecting things to improve in a hurry. Hopes that a good monsoon may see a pick up in agricultural production may have been dashed with the agricultural commissioner predicting a 1.2 million tonne shortfall in foodgrain output. Clearly, demand is not going to pick up.

That puts the focus back on investments and both economists and industry clamour for the government to step up infrastructure investments. They have a point. Public sector capital expenditure has declined from 8.2 per cent in 1993-94 to 6.7 per cent in 1998-99. Says Sekhsaria: ''No country can survive without spending adequately on infrastructure.'' Agrees a Planning Commission economist: ''Stepping up public spending, especially on roads and power will act as a driver for the rest of the economy.''

To pump prime or not?

But does the government's fiscal position allow for pump priming? The finance ministry isn't worried unduly by this demand. There's no need for extra expenditure, explains a senior official. ''If plan expenditure proceeds according to what's budgeted, that should be enough,'' he asserts. The National Highway Development Programme, he says, is on course as are some plan projects in the power sector. Speedier clearances for some private power projects, he admits, will accelerate investments.

He's also not losing any sleep over government finances, the sorry state of which is being seen as hampering investments. The government's large borrowing programme, for example, has been keeping interest rates high. ''The fisc is not off target,'' he insists.

More damage control or does he really mean it? India Inc. would like it to be true but the jury is still out on that one.

Additional Reporting by Aparna Ramalingam, Ashish Gupta, Ashutosh Sinha, Jaya Basu, Ranju Sarkar, Suveen Sinha, and Vinod Mahanta

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