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ECONOMY The Recession of the Recovery Bleak is the verdict on the Indian economy. A mid-year evaluation of industrial performance reveals that the second half of the financial year will be worse than the first half, implying that, for the third year in a row, a recovery will elude corporate India. By Rohit Saran
Very bleak. Paradoxically, while the confusion has cleared, it has brought no cheer. Slouching after a 30-month slowdown, (See Recovering To A Recession, BT, August 7, 1998), Indian business now seems to accept that there is no rescue in the works. And the agony of 1998-99 will prolong itself well into the next financial year. Both the hard and the soft data betray the telltale signs of this torment. In a display of across-the-assembly-line trouble, manufacturing output in the country grew by just 1.20, 2, and 1.97 per cent, respectively, in the months of July, August, and September, 1998, over the same periods of the previous year--the slowest since January, 1997. No wonder, according to the latest Confederation of Indian Industry's (CII) Survey Of Business Outlook--which was conducted in October, 1998--47 per cent of the ceos polled were pessimistic about the future compared to 19 per cent in April, 1998. Points out Kirit Parikh, 61, the Director of the Mumbai-based Indira Gandhi Institute for Development Research (IGIDR): `The sentiment is not strong since the fundamentals are not improving." Naturally, the investment trends mirror India Inc.'s dismal future. At least 6 mega-projects--embodying a collective investment of Rs 25,000 crore--came to a grinding halt between May and August, 1998: Bharat Petroleum Corporation's Rs 7,070-crore refinery, the Ispat Group's Rs 5,400-crore refinery, Rs 2,100-crore airport, and Rs 2,100-crore Liquefied Natural Gas terminal projects; Mitsubishi Electric's Rs 1,000-crore elevator project; and a Rs 1,700-crore Purified Terephthalic Acid project planned by Modern Threads. And the primary market collapsed between April and September, 1998, with only Rs 111 crore being raised through pubic issues. Even fast-growing businesses, like the small cars segment of the automobiles industry, are showing signs of fatigue. For example, the sales of Maruti cars--75 per cent of which comprise the 800--rose by just 2.04 per cent in April-September, 1998, over April-September 1997, versus 8.65 per cent in April-September, 1997, over 1996. Laments Mukesh Kalmadi, 46, Joint Managing Director, Sai Automobiles, Maruti Udyog's biggest dealer in Mumbai: "The period between August and September is the peak time for automobile sales. But, this year, we have struggled to maintain our normal levels.`'
Sure, the rhetoric of Prime Minister Atal Bihari Vajpayee, 71, and Union Finance Minister Yashwant Sinha, 60, who promised to boost the economy with a series of policy measures last fortnight, may have soothed the investor's nerves--the Bombay Stock Exchange Sensitivity Index rallied temporarily by 103 points between October 25 and 26, 1998, and has since hovered around the 3,000-mark--but that was, at best, transient. Every factor at play in the economy suggests that no such package of proposals can lead to an immediate recovery. For, novelty is not its strength. These promises are mere repetitions of what business has been fed ever since the Vajpayee Administration came to power in March, 1998. The restructuring of the public sector, the Foreign Exchange Management Act (FEMA), a New Telecom Policy, changes in the Takeover Code, and share buyback--they have all been in the pipeline for at least 24 months now. The same is true for Sinha's prescription, which entails simplifying automatic approvals for foreign investment, reducing the fiscal deficit to 3 per cent of GDP, liberalising the small sector, rationalising the labour laws et al. Even if they are implemented quickly, these steps will only boost demand after a lag of 6 months--at least. And, if the past is any indication, timely implementation is not this government's forte. In fact, neither the prime minister nor the finance minister spelt out the time-frames for the implementation of their proposals. Worse, the outcome of the November, 1998, Assembly elections in Rajasthan, Delhi, Madhya Pradesh, and Mizoram could dampen the economic resolve of the Vajpayee Administration in the Winter Session of Parliament. And that will only compound the chaos that is prevailing in the economy. What killed a possible recovery? In the first place, there haven't been too many signs of a recovery in recent times. Why, even the few flashes of an upturn in the first quarter of 1998-99 have now faded. BT lists 5 independent, albeit interrelated, factors that have put paid to the optimist's hopes: I. RUNAWAY INFLATION: Due to delayed--and ineffective--responses by the Vajpayee Administration, food-price inflation has choked off consumer demand. By appropriating a larger share of household incomes, food products have forced the middle class to postpone their purchases of industrial products. And a comparison of inflation with output data underlines the consequences: as the growth rate in the prices of primary products rose from 4.70 per cent in March, 1998, to 13 per cent in September, 1998, the rate of growth of output slipped from 4.92 per cent in April, 1998, to just 0.31 per cent in August, 1998, in the case of consumer durables, and plunged from 3.85 to 1.47 per cent in the case of consumer non-durables in the same period. This has also increased the pressure on the already-depressed prices of manufactures. Worse, the rate of inflation will ensure that lending rates do not soften in the immediate future, increasing the risks on new investments. Points out B.B. Bhattacharya, 52, Professor, Institute of Economic Growth: "The impact of the seemingly-uncontrollable increase in prices is going to be much more than just a temporary shortfall in demand." Adds out Shailesh Seth, 51, a consultant, and the president of the CII's National Committee on Capital Goods: "Not only is there no demand for machine tools, the orders earlier placed by our user-industries aren't being executed."
That inflationary fires are raging just when the global economy is entering a deflationary phase makes it even more inimical. Already, the disparity between global and national prices has intensified dumping, sounding the death-knell for demand-depressed corporates. Moreover, the spurt in the inflation rate will weaken the external value of the rupee, adding to the cost of imports even as its effectiveness to buoy exports will be suspect due to greater international competition--a no-win situation for business India. II. NON-REVIVAL OF RURAL DEMAND: While the 11th consecutive normal South West monsoon should have stimulated rural demand, the erratic rainfall has watered down the expectations of a resurgence. A lethal mix, floods in some parts, famines in others, has lowered the harvest-estimates of the rice crop to below its 1997-98 level of 820 million tonnes. If nothing else, that should keep away rural consumers till mid-1999. Even then, the revival of rural demand will hinge on the rabi crop and oilseed prices. Hardly succour for industry, which is struggling to widen its consumer-base. Points out Sunil Bhandare, 54, Advisor, Tata Services: "The widely-expected upsurge in rural demand stands postponed to February, 1999. Even then, its extent will depend on what happens in the next two months." III. STAGNANT URBAN INCOMES AND FALLING WEALTH: The 30-month-old downturn--and the resultant downsizing--has begun to affect pay-cheques. After all, it was the dizzy growth in salaries that had powered the retail boom in the mid-1990s. According to the BT Salary Sweeps, the growth of the pay-packets of senior, middle, and junior managers in 1997-1998 was 12.70, 14.90, and 9.60 per cent, respectively, compared to 30, 31, and 43 per cent in 1995-96. Worse, employees are losing jobs as well; in fact, 61 per cent of the respondents surveyed by the CII expected lower levels of employment in their organisations in the next 6 months. Couple these workplace woes to the erosion of shareholder wealth. After Pokhran-II and Budget 98 wiped out Rs 90,000 crore from the capital market between April and June, 1998, the us-64 imbroglio ate away another Rs 18,000 crore of market capitalisation between September and October, 1998. Laments Rajat Kathuria, 35, Director, Telecom Regulatory Authority of India: "Lost wealth and shrinking pay-cheques will keep shaving off demand." IV. ABSENCE OF INFRASTRUCTURE STIMULUS: Paradoxically, public demand has been languishing because of political inertia. Finance Minister Sinha's much-touted 35 per cent increase in infrastructure spending is yet to trickle down--to even the implementation stage, that is--6 months after he presented the budget. Neither has the promise of pricing reforms fructified, which could have easily eased the flows of private investment. Rues Indira Rajaraman, 51, Reserve Bank of India Professor, National Institute of Public Finance & Policy: "The commitment to infrastructure reforms that this government exhibited initially has all but disappeared." Even Sinha's other target for public spending--housing and construction--remains clouded by inter-ministerial financial and legal wrangles. For instance, the New Housing Policy has yet to be cleared by Parliament while the 3-year-old Delhi Rent Control Act--which is supposed to serve as a national model--has still not been notified by the Urban Affairs Ministry. Worse, the plight of the Treasury has put paid to any added state stimulus in the remaining 4 months of the fiscal year. Between April and August, 1998, excise duty revenues, which contribute 33 per cent to gross tax revenues, grew by only 9 per cent over April- August, 1997--15 per cent short of the target for the period. And the growth in the revenues from Customs duty was even slower at 2.60 per cent in April-August, 1998, versus a 1998-99 target of 17.43 per cent! Although corporate taxes have risen by an impressive 23 per cent between April and September, 1998, the growth-rate is likely to taper off in the second half since profits have fallen by an average of 5.16 per cent in the first half of the year. This will prevent any attempts by Sinha to pump-prime the economy even if he opts for an additional dose of personal taxation. Fears Kathuria: "Much of the investment commitments made in Budget 98 are not likely to fructify this year." V. SHRINKING WORLD TRADE: External demand--which accounted for 10 per cent of India's Gross Domestic Product and an equivalent amount of industrial output last year--has all but run into a recession. With Asia, barring Taiwan, limping, and most other economies cooling off, India's exports growth will, at best, touch 4 per cent in 1998-99. Which knocks the bottom out of Sinha's contention that India will not be a victim of the global financial crisis. Already, many a global financial institution, including the UNCTAD and the IMF, has halved its forecast for trade flows in 1998-99. Points out Arindam Banik, 40, a professor of international trade at the Delhi-based International Management Institute: "In an increasingly globalising economy, India can no longer ride out a global slowdown." So, an exports recovery will also elude Indian industry in the near future. |
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Abandon hope all ye who do
business here. Corporate India may have been torn between delight and despair, between the
imminence of a recovery and the inevitability of a recession, even 3 months ago. But now,
in November, 1998, it is sure of tomorrow. Only, the tomorrow in question is bleak. 
