Blame it on Godhra. What should have been an open-and-shut case of communal violence, is turning out to be corporate India's worst nightmare. Not because business in a state that accounts for 6 per cent of the country's GDP is in a shambles. Rather, it's because Godhra has struck at something infinitely more precious-confidence. It has uprooted optimism and planted uncertainty in its place-and fruits of uncertainty are always bitter.

For an economy standing at the beginning of a new fiscal just how shaky do things look? ''The situation is very unsatisfactory,'' says R. Seshasayee, MD, Ashok Leyland.

Indeed. Nobody is sure how long the fractured National Democratic Alliance (NDA) government will last. A change in administration-possibly succeeded by an equally weak alliance-could lead to changes in policies. That means companies will have to rework their strategies. Those who are unable to, will pay for no fault of their own.

Worse, key reforms needed to bolster industry's competitiveness may be pushed back. Already, the government is rolling back some cost-saving proposals made in Budget 2002 such as the hike in the liquified petroleum gas prices, and some cuts in subsidies. It's hard to quantify the damage such dithering may cause, but it is easy to see that its impact will be severe. ''The heightened political and social unrest is likely to depress growth and investments in the country,'' contends Paul Rawkins, Senior Director, Fitch Ratings, and the man in New York who does the sovereign rating for India.

The vote of no confidence in India could not have come at a worse time. As the first flush of corporate results seem to indicate, there was some kind of a revival-or what S.S. Bhandare, former economic adviser to the Tata group, calls the ''beginning of a creeping recovery''-happening in the last quarter of 2001-02. With industry cutting back on spending and consumers putting off their purchases, how will the economy fare in 2002-03? To put together a big picture, BT looked at five key components of the economy. The findings weren't, to say the least, heart-warming. Let's take up these five components one by one:

"The overall situation is not at all conducive for growth and the nascent revival is likely to be hit." R. Seshasayee, Managing Director, Ashok Leyland

"Gujarat can easily say goodbye to foreign investment for the next 10 years." U.R. Bhat, CIO, Jardine Fleming Asset MGMT, Company

Sectoral Growth

The Central Statistical Organisation's (CSO) data for the third quarter (October-December) seems to corroborate the notion of an economic revival. GDP growth at 6.3 per cent was much higher than the 3.4 per cent growth recorded in the same quarter last year. Where did the growth come from? Agriculture and services. Thanks to good monsoon, agriculture grew by 7.1 per cent compared to 0.8 per cent in the same period 2000-01. But the star performer was the services sector, which clipped at 7.2 per cent. Worryingly, though, industry grew by just 2.3 per cent.

If the demand for goods holds up, then the industrial sector may end up with just 3-4 per cent growth in 2002-03. That means agriculture and services will have to grow even faster to make up for industry's shortfall. Is that likely? Services-which comprise sectors like aviation, tourism, hospitality, and financial services-could be affected if domestic travel drops. While airlines and hotels are reporting improvements in capacity utilisation, it's still not a boom scenario that they witnessed as recently as 2000. The industry's best projections put the number of incoming tourists at 24 lakh-that's 8.54 per cent drop over 2000, when 26.24 lakh foreign tourists came to India.

The BT-NFO MBL survey of 178 CEOs, Vice Presidents, and General Managers across Delhi, Mumbai, Bangalore, Chennai, Hyderabad, and Kolkata, reveals that 30 per cent of the respondents did not expect to increase their capital spend in 2002-03. While M&A-thanks largely to the government's disinvestment deals-brought booming business last year, pure corporate deals may be harder to find this fiscal. Agrees Ashwani Puri, Partner, Pricewaterhouse-Coopers: ''Mergers and acquisitions will be affected, and the problem for the acquiring company is that it will be unable to fix a proper valuation for acquisition because of the uncertainty factor.''

While agriculture is likely to have recorded a significant growth (6-7 per cent) last year (2001-02), most economists believe that sustaining the performance next year will be difficult. The reason is simple: last year's growth looks substantial because its benchmark is a negative growth of 2 per cent in 1999-2000.

Add all the numbers up and the overall GDP may grow by 5.5 per cent, half a per cent less than expected. Per capita income, too, will inch up only by 3 per cent to Rs 17,200. ''To catch up with the world we need to grow at a much faster rate, but unfortunately the current environment isn't conducive for such growth,'' says Saumitra Chaudhury, Chief Economist at credit rating agency, ICRA.

Indeed, the impasse in Parliament over the removal of Gujarat Chief Minister, Narendra Modi, has not only effectively blocked the passage of important economic bills, but also put the reforms agenda on hold. Instead of introducing the much-promised second-generation of reforms, the Vajpayee administration is busy rolling back critical proposals such as cuts in subsidies to food and fertiliser, and tax sops. Other measures that would have reduced non-plan expenditure and yielded Rs 8,000 crore to the cash-strapped government are also being revoked. To make matters worse, some key bills such as the Fiscal Responsibility Bill, the Competition Bill, the Insurance (Amendment) Bill, and the Electricity Bill have been hanging fire for months now.

Foreign Investment

Last year, India received a mere $2.4 billion (Rs 11,640 crore) in foreign direct investment. Consider the country lucky if it crosses that figure this year. Here's the problem: foreign investors perceive the Godhra carnage as symptomatic of the country. And when you have other countries-like those in Latin America-going out of their way to woo foreign investors, there's no reason why a multinational would want to put its investments at risk.

Purely in terms of economics, the recovery of markets in America and other Asian countries makes it harder for India to win investor dollars. Typically, most of India's foreign direct investment goes into core sectors such as power, telecom, and oil. These are all capital-intensive and long-gestation industries, where constant change in government policies affect investor confidence. ''Only those investors who believe that they can get higher returns from India rather than other emerging markets, will now invest in the country,'' notes Kaushik Dutta, Partner in the international consulting firm PricewaterhouseCoopers. As for Gujarat, ''it can easily say goodbye to foreign investment for the next 10 years,'' says U.R. Bhat, Chief Investment Officer, Jardine Fleming Asset Management Company.

At the moment India's sovereign rating hasn't been affected, but if things worsen rating agencies may decide on a downgrade. Warns Rawkins of Fitch: ''If (the Gujarat issue) distracts the government from economic priorities of the day, which it appears to be doing, and weakens its resolve to pursue economic reforms and contain the deteriorating budgetary situation, then the implications from a rating point of view could be significant.''

Consumer Confidence

More than Godhra, it is probably Finance Minister Yashwant Sinha's Budget this year that has dampened consumer sentiment. Consider how a consumer in India's middle-class looks at his situation today: Companies are laying off employees, the cost of education and contemporary lifestyle-neither is reflected in the index for inflation-is going up, even as incomes are either stagnating or growing only marginally.

Worse, apart from effecting an across-the-board hike of 3 percentage points in income tax (through an additional surcharge), the Budget slashed tax benefits on investments in small savings and significantly reduced the number of people who could avail these benefits. Again, taxing dividend income from mutual funds and equity in the hands of the investors has added to their misery. Says Bhandare: ''The Budget has done the biggest damage to consumer confidence, which is reeling under the effects of a slowdown.''

Already, growth in the FMCG and auto sectors is eluding manufacturers. Hindustan Lever, India's largest FMCG company, reported a fall in sales by 9.9 per cent in 2001. In automobiles, while motorcycle sales are zooming, those of cars have grown at a marginal 3.6 per cent. (Tractor sales are actually negative.) Many analysts believe that if some low-end segments of consumer goods are doing well, it's because consumers are trading down-moving from relatively high-priced items to cheaper ones in the same category. ''That's a typical consumer response, when she is not sure about her future income,'' says Dutta of PricewaterhouseCoopers.

Still, if corporate results for 2001-02 have been good, it's primarily because over the last six years of slowdown, companies have learnt to be more efficient. A case in point again, Hindustan Lever, which despite its 9.9 per cent fall in sales increased its net profits by 26.2 per cent. Points out Bhat: ''What everybody seems to be missing out is the fact that there have been dramatic improvements in the capital efficiency of the companies.'' The point, however, is that without real growth, there's only so much mere efficiency can yield.

The Markets

Never the most stable of stockmarkets, the Bombay Stock Exchange Sensex is currently less volatile. The Federation of Indian Chamber of Commerce and Industry (FICCI) recently conducted a poll in which 50 per cent of the respondents said that the Sensex would hover between 4,000 and 5,000 by the year end. Unlikely, say several others. Especially if foreign institutional investors limit their exposure. And that is almost a certainty. Almost three-fourths of BT's respondents felt that foreign portfolio investment would be affected by the political uncertainty, and a third said the investment would fall marginally.

Public sector scrips-typically those on the block-that drove the stockmarkets in the recent months, appear to be losing steam. For instance, Shipping Corporation of India is 3.8 per cent off its peak, and Bharat Petroleum Corporation Ltd (BPCL) is down to Rs 302.9 compared to Rs 351.40 just three weeks ago. Explains Chaudhury of ICRA: ''Market players are just giving expression to the foreboding of bad news and nervousness about upcoming uncertainties.''

Exports

A steadily falling rupee is just about the only good news the Indian exporter is getting. Otherwise, the scenario is grim. Indian exports, already reeling under a worldwide recession (exports are estimated to have grown by just 3 per cent last year), could falter again. Higher oil prices are likely to negatively impact the recovery in the US and European economies, and to that extent depress their appetite for imports.

Gems and jewellery, dyes, chemicals, and pharmaceuticals-major export items in the Indian export basket-have a significant presence in Gujarat, and have been affected by the violence in the state. Ramu S. Deora, Chairman of Basic Chemicals, Dyes and Pharmaceuticals Export Promotion Council, while unwilling to guesstimate the potential losses, believes that exports of chemicals, dyes, and pharmaceutical products have been hit substantially because of transportation problem and large-scale worker absenteeism that lasted nearly a month. So the 11.8 per cent export growth for the next five years as envisaged in the new export-import policy may remain a dream.

For the damage to be controlled, first the sporadic violence in Gujarat and other places must die down. Then, the Budget must get passed for industry to feel confident about the Vajpayee government's staying power. Thereafter, the government must get back to the business of governing-of creating an environment where industry can compete globally, and consumers feel confident about their tomorrow. But given the impasse in Delhi, all that seems a tall order.