Business: Economy; Shaken and Stirred

Three months into its term, the verdict is out on the Government: it isn't strong, doesn't seem to care about business and even less about the economy.

It isn't often that Finance Minister Yashwant Sinha has stood with his back against a wall or seemed defensive. Ask him about his performance, and a well-intentioned statement from a minister three months into his job sounds like a tired platitude from a politician on auto-pilot facing the end of term. "I have assured Parliament that my job doesn't end with the presentation of the budget and that I accept full responsibility for implementing the initiatives announced."

A month back, scant days after presenting a budget that initially picked up praise, he would have been taken seriously. Now, he doesn't have a chance. Worse still, his boss, Prime Minister Atal Bihari Vajpayee, faces the same predicament. At a major economic conference on April 28, he announced a tough, 90-day plan of action which highlighted what industry wanted to hear and what India needed desperately -- reducing subsidies, pushing infrastructure, cutting red tape, boosting government investment, reforming capital markets, inviting both foreign and domestic investment.

"We simply cannot afford to play politics with the nation's economy anymore," Vajpayee had thundered then. "My Government is more than ready to be your partner in the realisation of your dreams. Will you be a partner in the realisation of my Government's agenda?" Last week, 60 days and counting, the same man was listening hard to suggestions for an urgent, top-level crisis of confidence meeting with many of the same businessmen and executives who had earlier applauded him. .

Post-Budget Forecast (Percentage change in 98-99)
	97-98	98-99
GDP	5.1	5.5
Agriculture	-1.7	4.2
Industry	5.3	5.5
Construction	4.4	5.5
Infrastructure	6.4	5.7
Services	7.8	6.8
Public Invst	12	7.9
Private Invst	13.5	14.4
Exports(in $)	3.6	4
Imports(in $)	5.4	5.5
Inflation	6.3	8.1
Rupee/USD	5	15
Fiscal Deficit (%of GDP)	6.1	5.7
Assumptions Foreign investment inflows will be $1 billion less than last year's $3.2 billion. Public investment is lower this year because states cannot substantially hike spending. Nominal interest rates will increase by 1 per cent. Average depreciation of the rupee against the US dollar this year is assumed at 15 per cent.

The perceived strength of his coalition Government is in tatters, the image of the Government is one of battling crises rather than pre-empting them. Talk of a timetable for action has remained mostly talk. "I think there is reason to worry because political uncertainty is not yet over and investors like stability," says Ashok Lahiri, director, National Institute of Public Finance and Policy. "But being in a coalition doesn't mean the government can't deliver if it wants to."

That's a truth totally masked in a large part with this Government's own ineptitude, a combination of cross-talk and crossed wires. "We believe that a government really does whatever it can in the first 45 to 60 days after it takes office and after that nothing substantive really happens. If it does, it's a bonus," says Tarun Das, director-general of the Confederation of Indian Industry, voicing a doubt that is uppermost in the minds of almost everyone in business. Few backed Sinha, including top officials of his own ministry, when he said the economy was on the upturn. A top bureaucrat said at a business-government round-table interface recently: "Nobody is talking high growth this year. The real objective is to stop the slide."

Lack of confidence is always a terrible thing, and it hasn't been this bad in years. The twist, strange but true, is that it comes through despite a better than expected corporate profits for the year ended March 1998. Estimates for the current year (see charts), both for industry and the economy, are also marginally better than what many doomsdayers believe. The rupee is beginning to hold against the US dollar, buoyed by news of the World Bank clearing projects and a feeling that sanctions are softer than expected. In the capital markets, the wild 100 to 300 point jumps and drops in the Bombay Stock Exchange's Sensitive Index is in the 20 to 100 range. Cynically speaking, it's bad but it isn't doomsday, like it is being made out to be. But broadly, the feeling of a crisis, quite legitimately, continues to be all pervasive.

Results of the latest Business Expectation Survey conducted by the National Council of Applied Economic Research (NCAER) are in and being tabulated. Published every four to five months, it clocked in at a shade over 83 in March, the lowest since it was started in May 1993 with a base of 100. After almost touching 160 in May 1994, when the economy showed the best performance of the decade, the Business Confidence Index has steadily moved down, climbing briefly last year only to record the so-called Dream Budget of former finance minister P. Chidambaram. "I think there's a reasonable degree of disappointment and the latest survey will reflect it," says Rakesh Mohan, director-general, NCAER. "I would be surprised if confidence levels are any better."

Just over a week ago in London, a consortium of investors was attending a conference on investing in one of India's big-tag private power projects. This included American insurance major AIG, Kodak Pension Funds, Capital International, Government of Singapore, CDC and other big guns. Even as the discussions were on, a parallel debate was raging in the room based on an interview given by former finance minister and Congress factotum Manmohan Singh -- every one of the investors had a copy of the clipping. Singh had mentioned much the same thing just after Sinha's budget: that this Government is directionless on the economy, the future is uncertain and that the country is heading for stagflation.

The investors couldn't have agreed more. At the end of the day, the funds -- which have just raised over $10 billion to be invested in emerging markets -- decided to defer the quota allocated to India: $2 billion. They decided that the funds would be better utilised for projects in Latin America. In Delhi, at an international conference on project finance for infrastructure in the last week of June, India regular Hans Schniewind, a general manager, global project finance, with Dresdner (South East Asia) Limited, talked of little else but a sense of deja vu after listening to a typical no-problem address by Union Power Minister R. Kumaramangalam. "That's the problem," he fumed. "Year after year, we hear there is no problem for solving anything, yet few problems get solved." Usually, listeners snigger when Kumaramangalam wisecracks. This time, a section of listeners, both Indian and expatriate, sniggered when he claimed power clearances were going ahead quickly.

It could have been different. Though the economic contraction is largely on account of the monetary policies of 1995-96 and an element of political uncertainty introduced around the same time, there was an opportunity now like never before. With the June 1 budget coming close on the heels of the reaction to India's nuclear test in early May, with the implicit threat of economic sanctions, the expectation was for Sinha to punch through with hard decisions on reducing wage costs and subsidies, disinvestment, company law, privatising insurance, cleaning up the capital markets and so on.

He did, in large measure, but statements which brought praise was quickly lost in the face of clumsy footwork in the fiasco over the petrol price increase, the scaling back of fertiliser price hike, first raising import duties and then quickly halving them to 4 per cent and providing no definite time-frame whatsoever for pushing legislative changes through for opening up insurance. "Post-Pokhran, bolder reforms were needed," says Lahiri. What industry got instead was a confused mass of signals.For the past eight years, economic pundits, corporate czars and management experts of every hue have said, repeatedly, that liberalisation of the economy and industry has its price. Openness means competition, competition forces efficiency, and turbulent times means a temporary ailment at best, corporate death at worst. This price, as they repeated ad nauseam, is a price that has to be paid if the economy is to change from a comatose slump to a carefree trot, if it has to break the shackles of command economy to one where the only command is efficiency.

A pre-budget poll of top CEOs conducted by India Today showed this logical trend, life in the times of a slowdown. An overwhelming majority, over four-fifths, said corporate belt-tightening will intensify in 1998-99, and over half said joblessness and lay-offs will increase. But a large part of the nervousness now was reflected even then, where all respondents held that political stability was important -- but not the most important -- as a factor for economic growth. Another indicator: on a scale of 1 to 10, the stability of the Government came in at a mean of 5.4; more than a quarter, however, didn't want to bet.

In effect, while one part of the economic prophecy has come true, the problem that persists is that while industry has been freed to a great extent, it is forced to face competition with rules, regulations and bureaucracy largely intact, with power availability dangerously low, the cost of money high, and the world beating at its door. And while Indian industry is getting comfortable with the fact that coalition politics is here to stay, they aren't equally convinced about a shopworn argument that irrespective of whichever government is in power, economic policy is headed in the right direction. Because it's like pointing a car in the right direction, finding it has a clogged fuel line but expecting it to reach top speed regardless.

The result is that the growth in corporate sales are really squeezed. According to a study by the Centre for Monitoring Indian Economy (CMIE) of 1,041 companies which declared results till June 25, the rate of growth in sales has almost halved to 8.32 per cent for 1997-98, compared to the previous year. While that is a definite dampener in the mood, corporate India, going by these estimates, is actually a leaner, meaner one, adopting every strategy to keep its head above water.

With goods not moving briskly off the shelves -- or the lot, in the case of cement and steel, cars and trucks -- companies are moving to "other income," cost-cutting and innovative marketing to stay afloat. So, while sales growth slumped, the companies reviewed slashed their expenditure: it grew by about 7 per cent, compared to almost 17 per cent for the previous year. Interest costs were slashed as well, with a wide-ranging programme of financial restructuring, the growth rate of almost 14 per cent being less than half the payout the year before. Thanks to tax cuts proposed by Chidambaram, companies paid 13 per cent less tax than the year before. It all came wrapped in a bottom line, the net profit, which grew by almost 15 per cent, compared to a negative 3 per cent growth in 1996-97.

Expectedly, different companies and industry segments have reacted differently to the difficult business cycle. It can take a long to get out of a business cycle and even developed economies -- driven by miscalculations of over capacity, supply that outpaces demand at home and abroad, and competition from exports, can take three-five years to get out of such a cycle. "Let's face it, it's a growth recession we are going through, it's not a recession in the true sense, so there is no reason to panic," says Pradeep Srivastava, RBI chair professor at the Indian Council for Research in International Economic Relations, and chief economist with NCAER. "The current problem is also because of over-investment and the monetary squeeze of 1995-'96. These things take time to get over. What you should really be doing is consolidating, focusing on productivity gains today to get a higher growth tomorrow."

Some are riding a boom, like the software industry which, at just under 70 per cent, outperformed the average growth of industry by ten times, riding on exports, a demand for banking and finance software, and NASSCOM President Dewang Mehta predicts an even faster rate of growth this year. Some are creating a boom -- and marketing history -- in a flat market, like Baron International's Kabir Mulchandani who, through too good to be true exchange and freebie offers with Akai colour TVs, claims to have more than doubled the sale of TVs to 4.5 lakh for the year ending March 1998 over the previous year. His philosophy: "To rise above the rest, I decided to reduce prices (about 30 per cent below the market) because with my kind of volumes I can cut costs. Consumer durables king Hindustan Lever cashed in on a personal products and branded foods boom combined with aggressive marketing to close the year with a 35 per cent increase net profit to Rs 506 crore on a 18.5 per cent increase in sales to Rs 7,820 crore. This year, it plans to push its gain by Rs 100 crore more by a simple cost-cutting exercise: eliminating third-party distributors.

Then, there are two sides to the same coin, a simple case of stratagem over sloth. Driven by over capacity and slowdown in its segment, Chennai-based Indian Cements effected a VRs scheme to chop by almost three-fourths its 12,000 workforce. At the other end, Gujarat Ambuja Cements took the fight to the market, directly to the retailers, by cutting out wholesale middlemen -- therefore, reducing costs -- and splash marketing. It cut into other's market share. In the two-wheeler segment, Rahul Bajaj is planning to battle a 4 per cent drop in market share largely to arch-rival LML by introducing more models and cutting costs -- among other things, by reducing the number of vendors from 800 to 300 and grouping them in areas near its plants in Pune and Aurangabad. "This was long overdue," he says, with characteristic bluntness.

This is in the natural order of things in the corporate world. As Mahesh Vyas, executive director of CMIE says, "This year we have seen the wheat being separated from the chaff." Unfortunately, part of the order that was to come as naturally, as Vajpayee says, from a government that "doesn't look upon commerce and industry with suspicion," isn't getting anywhere yet. As Parliament resumes its session, a few things are already becoming clear as daylight: the economy is not a priority with this Government, whatever anyone says. Or if it still is, it no longer seems to be.

Meanwhile, doublespeak, the bane of this Government, continues to gain momentum bordering on legend. It picked up steam last month when the RBI announced a package for reviving exports -- expected to limp along at 4 per cent this year -- only to have Commerce Minister Ramakrishna Hegde call it "dubious". While Swadeshi Jagran Manch convener S. Gurumurthy calls to fight sanctions through the World Trade Organisation, BJP President Kusha- bhau Thakre feels that India should walk out of the WTO, the only organisation through which India has half a chance of fighting and winning its trade negotiations. Two weeks ago, Sinha and Industry Minister Sikandar Bakht were busy telling the world that sanctions wouldn't affect India. Last week, Ministry of Finance mandarins told the Standing Committee on Finance that foreign inflows would be hit by the sanctions and the downgrading of India's sovereign debt rating by Moody's Investor Service but the foreign exchange reserves were comfortable.

The jury is out on that one. And the real truth is perhaps the joke doing the rounds in Nariman Point, Mumbai's business district. What crisis of confidence? it goes. There's no confidence, how can there be a crisis?