Q. Who is an optimist?
A. One who is very bullish on the Indian economy.

Q. And who is a pessimist?
A. One who is bullish on the Indian economy.

This is not a new lesson in English language. It is an indicator of the current sentiment on the state of the economy, which has made even the most pessimistic hopeful. Though parts of the Indian economy have been shining for at least two years, dark clouds accompanied every silver lining in the past. For instance, Companies reported spectacular sales, but there was no increase in jobs. The big and the mighty of India Inc. were shedding workforce. It was an economic recovery without economic relief.

In 2005, the big difference is that the growth has fewer ifs and buts around it, i.e. it is as good in spread as it is in speed. Consumers are on a buying spree, aided by affordable pricing and abundant credit. Companies are riding on an investment tide, propelled by soaring profits on the one hand, and low interest rates and lure of the global markets on the other. The riches made from stocks and real estate markets have fuelled optimism. And the biggest factor is that job creation is finally happening-and how. According to studies, new job creation in urban areas this year has been the highest since 2000, as has been the rate of increase in salaries. Even so, leading recruiters expect to break new records in employment opportunities and income levels in the coming year. Some sectors have seen such a dramatic change that instead of job-seekers doing the rounds of companies for jobs, corporations are hiring from campuses or other companies (see story on jobs and salaries).

As the economy gets from being good to better and perhaps to the best-ever, the question is: what next? If this is the best economy India has ever had, it is a cause for both celebration and concern as the road ahead from the peak is invariably downhill. Already, signs of growth fatigue are showing. To determine how long the economy's dream-run will last and to debate whether this is the beginning or the end of a prolonged party, India Today held a meeting of the Board of India Today Economists (BITE).

The five-member BITE panel was more bullish than it has ever been in its eight meetings since 2002 (see box: The BITE Insight). We also reached out to ceos, promoters, head-hunters and bankers to capture the sentiment from the boardroom. Corporate India was one step ahead of the economists in confidence. Here is the verdict on what is powering the current boom and how strong it is likely to be.

The CONSUMER rules. But for how long?

PICTURE SPEAK

"After IT, the next big thing could be textiles. JAIRAM RAMESH, ECONOMIST AND MEMBER OF PARLIAMENT

Time was when people checked the price of a product before buying it. If it was within their reach, they would go ahead or else they would postpone the purchase till their budget matched the price. Affordability was a function of price and income. Not any more. For a growing number of products and services ranging from mobile phones to higher education, people have begun to look at the EMI rather than the MRP. Credit, along with price and income, now defines affordability. The EMI is the single biggest contributor to the explosion in demand for housing, automobiles and consumer products. Indians will buy over a million cars in 2005. At an average price of Rs 4 lakh a car, it adds up to Rs 40,000 crore a year. Spending on mobile phone handsets will top Rs 13,000 crore during the year. ICICI Bank's retail credit disbursement grew 47 per cent between the first half of 2004-5 and the same period of 2005-6-from Rs 18,479 crore to Rs 27,087 crore. With banks and financial institutions chasing customers for loans, financing innovations are here to stay and grow.

The other new determinant of demand is product innovation. "Finance and product innovations have begun to drive certain kinds of demand just about as much as price and income do," says Ajit Ranade, chief economist, Aditya Vikram Birla Group. And what is product innovation? Shampoo sachets for Re 1, chhota recharge (for cell phones) for Rs 10, personal computers for less than Rs 10,000. These innovations break the price barriers for consumers, especially in small towns, and create markets where none existed. "Consumer demand is finally spreading to small towns, with up to 30 per cent sales of products like two-wheelers coming from non-metros," says Siddhartha Roy, chief economist with the Tata Group. This year's pick up in the sales of fast moving consumer goods (FMCG: soaps, shampoos, cosmetics and food products) also signals a revival in rural demand.

THE PARTY POOPERS

No movement on reforms like deficit reduction, greater FDI, easier labour laws and disinvestment. A possible rise in inflation and interest rates that will hurt consumption and investment. Lack of headway in critical infrastructure of power, transport, ports and water supply. A sudden and prolonged fall in real estate and stock markets would wipe out wealth, kill sentiment. A global meltdown that will reduce foreign investment and cut back demand for exports.

There is one potential worry: interest rates have begun to inch up after having hit the bottom. "The two demand triggers of the past two years-a steep fall in interest rates and price competition unleashed by foreign companies that entered India-have petered out," warns Subir Gokarn, Chief Economist, CRISIL. A rate hike will not affect those who have already bought on fixed interest rates.

For the new borrowers too, banks would rather increase the length of repayment than hike the amount of EMI. That is another way to retain affordability in the face of rising rates. Besides, the rate hike so far has been too small to dampen demand. "I expect interest rates to remain flat," says V. Vaidyanathan, senior general manager, Retail Banking, ICICI Bank. He does not foresee demand for retail loans, and thus the consumption funded by loans, to suffer unless interest rates rise again to 15-16 per cent levels. Jagdish Khattar, managing director of Maruti Udyog and one of the biggest beneficiaries of loan-driven auto boom, is not worried either about interest rates affecting demand. EMIs apart, price cuts will continue to act as a demand magnet, particularly for replacement demand. R.K. Zutshi, deputy managing director, Samsung Electronics India, says prices of high-end products like plasma TV have gone down by as much as 30 per cent in the last year alone.

PICTURE SPEAK

"The Interest rate hike is unlikely to hit demand." JAGDISH KHATTAR, MANAGING DIRECTOR, MARUTI UDYOG

All this is about private consumption. Shankar Acharya, former chief economic adviser and professor at ICRIER, reminds that things are not as rosy when it comes to what can best be described as public or government-aided private consumption-water, roads, education, health and even law and order. "I am not very optimistic about this consumption improving in the near future," he says. Private substitutes for some of these public services have already begun. People have started to employ security guards and buy packaged water. But these substitutes are affordable only for a certain class of consumers. Bibek Debroy, director of the Rajiv Gandhi Institute for Contemporary Studies (RGICS) sees private provision of some of these services as an obvious and the only solution.

VERDICT: It is not just price and income, but also innovation in financing and products that is driving consumption. That should make consumer demand lasting, even though interest rates will not fall further.

India Inc is finally INVESTING, and how

PICTURE SPEAK

"Companies are looking at globally competitive costs." MOHIT BATRA, HEAD, PROJECT FINANCE ICICI BANK

If India Inc. was not creating jobs in the past, it was because it was not investing in new plants. There was excess capacity and additions were incremental. Thankfully, that is history. Centre for Monitoring Indian Economy (CMIE) estimates total outstanding investments in October 2005 at 39 per cent higher than the level a year ago. RBI figures show growth of 30 per cent in credit offtake for two years in a row, which Ranade says is a record. The figures tell only part of the story. The quality of current investment proposals is better than what was proposed during the last exuberance of the mid-1990s. Says Mahesh Vyas, CEO of Centre for Monitoring Indian Economy (CMIE): "The inflection point for investments became evident in early 2004. For almost six years prior to that, the amount of investments envisaged in the country was completely flat." He considers the quality of proposed investments to be better as unlike in the past, projects taken up now are by big companies and are being largely funded by internally generated funds. That shows the sincerity of intent.

A large proportion of new projects is from the manufacturing sector-a break from the past when services companies were the only ones investing. Typically, manufacturing investment creates bigger and better linkages by creating demand for cement and steel and generating good quality white-collar and blue-collar jobs. Current investments are also global in scale and size. "Companies setting up projects are now looking at globally competitive cost of production, " says Mohit Batra, head of project finance at ICICI Bank. He lists out sectors ranging from steel, alumina, textile and auto ancillaries coupled with various infrastructure sectors where big projects are taking shape. These will join the party with the already booming sectors such as automobiles. Investments will rise even though growth in sales and profits settles down from 20-30 per cent rates recorded in the past two years to a sustainable 10-15 per cent level.

After years of neglect and disinvestment caused by crippling laws of small sector reservation and labour welfare, textile industry is witnessing a flurry of investment. That holds promise for large scale employment. After the end of quota system for garment exports to the US, India has gained an additional export market of about $2 billion. "If we get things right now, after it the next big thing could be T-textiles," says Jairam Ramesh, economist, Congress MP and moderator of the BITE. Investments undertaken today are for both domestic and foreign market. A relatively under-reported fact amidst all the good news on the economy is that exports have been rising at the rate of over 20 per cent for a third consecutive year. "'Made in India' is finally becoming price competitive," says Debroy.

Government: a NON-PERFORMING AGENT

PICTURE SPEAK

"The economy will grow at 8 per cent in 2006-7." AMIT MITRA, SECRETARY-GENERAL, FICCI

So far, the Government has been the only disappointment. It is not that nothing is moving at the economic ministries in Delhi; the movement is frustratingly slow. If some key reforms are stuck because of opposition from the Left (see accompanying story: The Burden of Left), the laxity on others defies explanation. For instance, the Electricity Act of 2003 was supposed to bring in a new era in power reforms. However, no improvement has taken place in distribution and transmission. The Act allows companies with captive power plants to supply excess power to third excess power to third parties, but the charges are so high that companies don't find it viable. So, new generation capacities are being created when many captive plants have excess capacities. Similarly in labour laws, not every reform required deals with retrenchment. While the issue of easier lay offs can await political consensus, other inimical provisions of the law can be changed. "If we can't reform labour laws, let us at least remove laborious laws," says Debroy. On infrastructure other than power, there is finally some good news. Vinayak Chatterjee, Chairman of Feedback Ventures estimates investments in infrastructure to double in 2006 to about Rs 95,000 crore. He is particularly hopeful of good progress on roads. Railways and airport should also see big investment. State governments, just like the centre, are successfully finding ways to find funds for infrastructure outside their budgets. This will ensure that improvement in infrastructure is not held hostage to government deficits.

OIL PRICES AND INFLATION

On the Watchlist High crude oil prices, even if partly absorbed by the government, could take some steam out of consumer demand and corporate profits. Price of a barrel of crude has remained above $50 for a year and after touching a peak of $70, it is hovering around $58. "The Indian economy can adjust to shocks below $40 a barrel. Anything above that is in discomfort zone," says TERI director general R.K. Pachauri. Though oil distribution companies have so far borne the bulk of the rise without letting it pass on to retail prices of petro products, a few rounds of hikes that the government has allowed in the past year are already showing up in inflation. Fuel price inflation in October stood at more than 11 per cent. What kept the rise in wholesale prices at a manageable 4.5 per cent was low to negative inflation in manufactured products and a fall in food prices. According to Subir Gokarn, Chief Economist with CRISIL, companies have been able to balance the relative rise in fuel and transport costs with stable commodity prices and fall in telecom costs. A further hike in crude could force price hikes. The government can cut taxes on oil to cushion the rise, but that will hurt the public finances. All in all, the price situation is worrisome. But there is no need to panic. After all, the consumer price inflation is still a modest 4.3 per cent. - By Puja Mehra

So where does a combination of boom in consumption and investment and middling government support take the economy? Amit Mitra, Secretary General of FICCI, expects the economy to grow at least at 8 per cent in 2006-7. He is betting on forces of globalisation that have made India Inc competitive and on improvement in infrastructure. Mitra may be erring on the positive-not uncommon in these times. BITE economists too predict the economy to grow at close to 7 per cent in 2005-6 and 2006-7. Even if growth remains high, sentiments may not as corporate profits and stock prices might fail to repeat the spectacular performance of the past two years. And real estate may not be the wealth creator that it has been in the recent past.

VERDICT: Four consecutive years of 7% GDP growth-a record-looks certain. Government support can even deliver a double digit economic growth.

- with Malini Goyal and Puja Mehra

Index