April 5, 1999
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KAUTILYA Infosys is Westward Ho At last an Indian company lists on a US stock exchange. By Jairam Ramesh Indian industry has clearly been going through troubled times. Industrial production grew by 8.4 per cent in 1994-95 and by a whopping 12.8 per cent in 1995-96. But thereafter it has been downhill -- 5.5 per cent growth in 1996-97, 6.6 per cent in 1997-98 and perhaps no more than 4 per cent in 1998-99. The fall in farm output in 1995-96 and 1997-98 adversely affected industrial demand in 1996-97 and 1998-99 respectively. But the growth in money supply has been such that the constraints on industrial expansion arising out of the decline in farm output have not been as severe as one might expect. So, why the slowdown? First, the credit squeeze supposedly imposed in late 1995 by the government, battered by an inflation rate of 10.8 per cent in 1993-94 and 10.4 per cent in 1994-95. This argument is not convincing. True, as against an average increase of 16.5 per cent per year between 1990-91 and 1995-96, the increase in bank credit to the commercial sector, however limited a measure of total flows, was just 10.9 per cent in 1996-97 and 15.1 per cent in 1997-98. The fact is by 1995-96, the capital market had begun to sputter. This meant companies could not raise equity. If they could not bring in money, there was no reason for banks to lend. Banks themselves were under pressure to fund only projects that met global criteria for economic viability. What is probably more valid is that tough action against non-banking financial companies (NBFCs), particularly from 1996-97 onwards, has caused financing problems for specific industries like commercial vehicles and consumer goods. Also, the credit-delivery mechanism has choked, what with the bankers' dread of the CBI and the CVC. Second, high interest rates that persist because of the high fiscal deficit are hurting private investment. This is not persuasive at all. Investment boomed even when interest rates were high and as industrial growth has declined the prime lending rate has also come down from 16.5 per cent to 13 per cent. Nevertheless, even though it has not caused the slowdown, interest rates must reduce. But as long as banks are owned by the government, this will not happen. Third, import liberalisation. This is a bogus argument. As Montek Singh Ahluwalia shows in a soon-to-be published paper between 1991-92 and 1995-96, as industrial growth accelerated, the import-weighted average customs duty rate fell from around 87 per cent to 27 per cent -- with a depreciation in the real effective exchange rate providing the compensating cushion. Ironically, this average has increased to 30 per cent as industrial growth has slackened. Imports as a proportion of total consumption in many industries have fallen; in steel, it has come down from 9 per cent when industrial growth was at a peak to about 6 per cent now. Fourth, global deflation and export deceleration. From 1996-97, world export growth and prices began declining and this had its effect on segments of industry. But the roots of export collapse are more domestic than foreign. As long as small-scale reservations continue, India will never emerge as a major exporter in industries that count, like garments and consumer goods. We are even losing market share in growth areas like leather (6.3 per cent to 3.5 per cent), tea (22 per cent to 11 per cent) and drugs (1.2 per cent to 0.5 per cent). The export boom of 1993-96 was largely the result of the two devaluations of July 1991 and the trade liberalisation of 1991-92 that substantially undercut the incentives for under-invoicing of exports. Once that effect petered out, export growth came to a screeching halt. Will another one-shot exchange rate adjustment help? Probably not, since according to the RBI, the rupee is actually under-valued in relation to the dollar by about 2.5 per cent and the over-valuation with other currencies is just 3-4 per cent. A fifth explanation for the slowdown is restructuring that is good for investment in the medium-term but has negative effects on growth in the short-term. Corporate India is in the midst of a long overdue phase of clean-up. A good example of this is the cement industry, where 56 companies are producing 91 million tonnes per year. However, the industry profile is changing and in the past 18 months, there have been nine acquisitions worth almost $850 million. Most industrial markets, however, are still far too fragmented. The answer to the excess capacity problem is simply to allow a shake-out and permit exits more freely, albeit humanely. It is also obvious that in a number of consumer industries companies simply underestimated the price sensitivity of the Indian market and overestimated the Indian consumer's willingness to pay a premium for brands. Finally, industry has been affected by a slackening in government investment programmes at the Centre and, more importantly, in the states. The fiscal deficit has to be cut substantially. But finance ministers must be allowed to do it in an investment-friendly manner. In areas that create demand for industry, like power, irrigation, roads and construction, physical additions to capacity have come down. Private-sector projects have got bogged down. In power, the country added 4,200 mw per year during 1992-95, just 2,124 mw in 1995-96 and 1,624 mw in 1996-97. More than the quantity of state spending, it is the quality that is impeding growth. Governments are spending on the wrong things and demand-stimulating investment has become a casualty. An increase in public spending without structural reforms is not the way out of the morass. The author is secretary of the AICC's
Economic Affairs Department. |
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