Economy: The Recession of the Recovery, Pg 2

What prevents a full-blown recession?
Only the performance of the infotech, consumer electronics, and petrochem sectors.

Rajat Kathuria

"Lost wealth and shrinking salaries will keep shaving off demand."
Rajat Kathuria
Director, TRAI

More than a third of industry has been reeling for more than a year. However, the Index of Industrial Production (IIP) has not slipped into negative growth so far, and is unlikely to do so in the near future. That's because certain businesses--such as telecom, computer software and hardware, consumer electronics, and petrochem--are still notching up high growth rates.

Aided by the expansion of the private and public telecom network, the sales of cables rose by 93 per cent in April-September, 1998, over 1997. Strong global demand for software and rising domestic sales of cheaper hardware helped the computer industry grow by 30-plus per cent. Huge additions to refining capacities, and the rising global demand for polyester staple fibre and polyester filament yarn are driving the petrochemicals industry. And innovative marketing strategies have provided a stimulus to the cosmetics and TV industries. Even in these sectors, sales growth has been achieved by either keeping prices constant--or by reducing them. Which will impair the capacity to reinvest in them.

A BT research project, which analysed the 7-year sales profiles of the Top Ten sectors shows that there were more consumer goods industries among them in 1997-98 than in 1992-93, when the last industrial upturn took place. While such a profile may, eventually, ensure a backward flow of demand to other industries--capital, intermediate, and basic goods, that is--the process, per se, will be slow. Only some segments in the consumer goods industry are growing and, unfortunately, they do not possess the necessary backward and forward linkages with other businesses to pull them out of a slowdown quickly.

Analyses Bhandare: "A fast-growing infotech or consumer-durables company may not have the kind of immediate demand-pull impact that fast-growing companies in the capital or basic goods industries will." True. Don't forget, the industrial upturn of 1992-93 was fuelled by massive expansions of capacity in, among others, the steel and cement industries. For instance, in the mid-1990s, steel and cement, on an average, added 3 and 6 million tonnes, respectively, to their capacity every year. No longer.

Although the cement industry may, apparently, be signalling a revival--sales are projected to grow by 6 per cent in 1998-99 over 1997-98, up from 3.50 per cent last year over 1995-96--this is being propelled by price-reductions of 7-10 per cent across the country since April, 1998. Obviously, their inventories are forcing the cement companies to extinguish their stocks--at any price.

Similarly, although the demand for Heavy Commercial Vehicles (HCVS) may have picked up in October, 1998--the only evidence: TELCO's production rose by 70 per cent in October, 1998, over September, 1998--the fact remains that TELCO's HCV production rose by 154 per cent in May, 1998, over April, 1998, which was followed by a 3.85 per cent fall in June, 1998, over May, 1998, and, likewise, by 136 per cent in February, 1998, over January, 1998, followed by a 78 per cent fall in April, 1998, over March, 1998.

Shailesh Seth

"Not only is there no demand, the orders earlier placed are not being executed."
Shailesh Seth
President CII's National Committee on Capital Goods

Clearly, month-on-month increases and decreases in production are misleading indicators of trends; year-on-year growth-rates are the real pointers. And they do not presage a recovery: TELCO's HCV sales between April and September, 1998, were 38.23 per cent less than in April-September, 1997, which, in turn, was 29.78 per cent less than in the same period of 1996. Don't forget, the country's second-largest producer of HCVs, Ashok Leyland, has resorted to a 3-day week in September, 1998. And that could be the real sign of the economic times.

What lies beyond 1998-99?
Definitely, uncertainty. Only more reforms could improve the sentiment.

By all counts, this will be the Year Of The Crawl, with the IIP rising, at best, by just 5.50 per cent compared to 6.60 per cent last year. In fact, the BT GDP growth forecast is now 5.30 per cent for 1998-99, 0.70 percentage points lower than the June, 1998 forecast. Beyond 1998-99, the chances of a revival are punctuated with ifs. If the Vajpayee Administration is able to unlock the infrastructure sector through a judicious mix of legal and administrative reforms, it could, after a lag, pull the capital and basic goods industries out of the downturn. Such an initiative would, crucially, increase consumer confidence. Agrees the IGIDR's Parikh: "A couple of ordinances to clear some of the pending economic legislation, the outright sale of a few ailing public sector units, and the quick financial closures of pending private power projects could together make a big difference."

To restore business confidence, the Vajpayee Administration must also ensure the passing of all the business-related Bills--which have been on the back-burner for more than a year--in the Winter Session of Parliament. Of course, the government can administer a stronger revival pill if it presents a bold budget in February, 1999, which does not fall between the two stools of protection and liberalisation, but caters to the realistic demands of corporate India by restructuring expenditure and simplifying procedures.

Yet, this obvious--and obviously repetitive--agenda is a tall order for a government that has crippled customer sentiment simply by its mismanagement of food prices. Tragically, the Vajpayee Administration's inclination to manage liberalisation is equally suspect, which is why a pall of recessionary gloom still has the economy in its terrible thrall. And they're calling it swadeshi stagflation.