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ECONOMY,
RECOVERY
As Good As It
Gets?
The
economy has been chugging along well
this year. Will it pick up speed or lose steam in the coming months? Right
now there is more optimism than unease about the future.
By
Rohit Saran
 If
you are a middle-class urban consumer, look around and savour this moment.
Jobs galore, salaries on a high pitch, inflation -- especially on the
non-food products -- at one of its lowest levels, real estate prices stagnant
for years, and business sales and profits on a high trajectory. The spate
of good economic news has some experts wondering if this is India's best
economy ever.
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Graph
to Tell Tomorrow
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In
any economy, at any point in time there are some pointers to the
future. In India the state of monsoons foretells crop output and
farm incomes. Borrowing by industry could give some idea of future
investments and production. But these are, at best, partial pointers
to the future. What if there is a composite index of all such economic
indicators that are known to drive economic growth? Such an index
could provide a single-point reference to the future. Most developed
countries in the world have such an index -- called a leading index
since it's meant to lead the economy.
India's
command and closed economy of the pre-1990s had no scope for such
an index. Post liberalisation, there have been attempts at developing
a leading index for India. One of the most accurate and updated
of all such indices is the one jointly developed by Pami Dua, reader
at the Delhi School of Economics (DSE), and Anirvan Banerji, director
of research at the New York-based Economic Cycle Research Institute
(ECRI). The duo studied all the business cycles in India since the
1950s to develop a set of leading and coincident indices. The latter
mirrors the actual growth of the economy.
If
the leading index is accurate, its movements should predict movements
in the coincident index. In other words, a rise or fall in the leading
index should -- after a lag -- cause a rise or fall in the coincident
index. That's exactly what the chart here depicts. Plotted monthly
since June 1998 to April 2000 (the latest month for which data are
available) the graphs shows that the growth rate in the leading
index was the highest between December 1998 and September 1999.
Assuming a lag of six months, that implies a period of high economic
growth from late 1999 through the mid-2000. Points out Dua: "The
current slowing down of the growth in the leading index forebodes
a moderation in the economic growth in the months ahead." But
be sure, the prediction is of slow growth, not no growth. That is,
the level of economic activity will continue to rise.
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If that leaves
you with a sense of disbelief, try remembering when was the last time
that prices of consumer durables had gone up. Why do interest rates on
hire purchase keep falling and falling? By how much has your salary risen
in the 1990s? And if you are working in the private-corporate sector,
how many times have your job opportunities multiplied in recent years?
As a consumer you are enjoying the unbeatable combination of plentiful
jobs, rising salaries and relatively low inflation.
The picture
looks less rosy if you survey the economy as a producer. Especially, after
the RBI's recent "misstep" of hiking the bank rate (the rate
at which the central bank lends short-term money to banks) by one percentage
point. That has flared up interest rates at a time when industry is expected
to make big investments. If the hike was to stem the fall in the rupee
value, the impact has been quite the reverse. The rupee fell to Rs 45.5
against the US dollar on August 7, the level from which it was supposed
to have been rescued. The ripples in the foreign-exchange market created
unease in the capital market with foreign institutional investors (FIIs)
offloading their shareholdings.
But beyond
these glitches, corporate India isn't doing badly at all. After limping
for three years since 1996-97, sales of manufacturing companies rebounded
in 1999-2000, posting a growth of 23 per cent over the previous year.
The spurt in sales continues well into the current financial year (see
box). Similarly, profits are also on the rise.
These are
more than the symptoms of a normal industrial turnaround. These are signals
that the dark clouds of economic restructuring -- which squeezed profits
and jobs -- are finally clearing. "The surge in sales and profits
bears out hope of a lasting recovery since it has come in a more competitive
environment than ever before," points out Shashanka Bhide, chief
economist at the Delhi-based National Council of Applied Economic Research
(NCAER).
No wonder
forecasters are sanguine about the future. The Mumbai-based Centre for
Monitoring Indian Economy (CMIE) has just released its best forecast for
the economy ever -- predicting a 7 per cent growth in the gross domestic
product (GDP) in 2000-2001. NCAER is also betting on a 7.1 per cent GDP
growth this year -- its highest forecast ever. Economist Bibek Debroy
foresees a long-term annual growth trend of 7.5 per cent over the next
10 years. That would undoubtedly be India's best economic performance
ever.
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THE
CHANGED QUALITY OF GROWTH
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Services
sector now accounts for nearly 50% of national income.
Family
incomes are rising faster than individual incomes.
Job
opportunities are more diverse.
Productivity
of capital and labour has increased.
Industry
is more competitive today than it was in the previous boom.
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It's not
that India hasn't attained such growth rates before. In fact, the country
witnessed its longest period of continuous economic expansion in the 1980s.
But that boom was artificially fuelled by government spending which initiated
an inflationary spiral and crippled the economy in 1990 and 1991. The
growth today reflects more fundamental qualitative improvements in the
Indian economy. Admits Mahesh Vyas, executive director, CMIE: "A
7 per cent growth in GDP today would be vastly superior to the 7 per cent
of the 1980s."
But before
analysing the reasons for the economy's present strength, it is worth
dwelling for a while on its happy consequences. Never before, for example,
has a job market provided so many opportunities to so many people. An
informal indicator of the profusion in jobs is the increasing thickness
of Ascent, a weekly job supplement of the The Times of India, which now
carries 16-18 broadsheets of job advertisements, up from eight pages in
mid-1999.
True, part
of the apparent profusion is due to higher job mobility. People switching
jobs faster creates the impression that there are more employment opportunities.
That apart, the economy is undoubtedly adding new jobs. "In terms
of job opportunities, this is the best year we have seen since we entered
India six year ago," says Preety Kumar, managing director of Amrop
India, a head hunting firm. Sumer Dutta, CEO of a leading human resource
consultant, Noble & Hewitt, adds, "Both salaries and jobs are
expected to boom throughout this year." Reasons: the mushrooming
of dotcoms, an imminent entry of private insurance firms and restructuring
in traditional businesses.
Rising employment
and income should keep demand buoyant, which must be met by higher production.
And higher production must -- after a lag -- need higher investments.
Not all the links of this elementary economics are in place right now.
A substantive worry is the lackluster investment, especially by manufacturing
companies. The rebound in sales and profits should have prompted a majority
of companies to start investing in new capacities, lest demand outstrip
supply. Yet, not many manufacturing companies have announced an investment
plan. The number of companies raising money from the primary capital market
has grown, but they are mostly infotech companies. Banks' lending to industry
isn't noticeably high. The sanctions and disbursals of loans by financial
institutions (like ICICI and IDBI) have surged a bit, but not for long
enough to be construed definitive. "The stagnant investment in the
face of a strong demand revival beats conventional economic logic,"
says M.R. Madhavan, senior analyst with the Mumbai-based ICICI Securities
and Finance Company.
The stagnation
in investment could be because many industries still have excess capacities
built during the heady days of the mid-1990s. Or it could be that domestic
demand is being met through imports, bypassing local industry. Most economists
feel that imports are not depressing demand for domestic products right
now -- though they could in the future when tariffs on consumer goods
imports fall further.
There could
be another -- and deeper -- reason for the delay in investment. The effects
of corporate downsizing and the focus on improving corporate efficiency
are finally showing up in higher productivity of labour and capital. Increased
productivity means it will take less capital and labour to produce something
today than it would have a decade ago. Concurs Debroy: "There is
more than a cyclical snap-back in productivity." A recent World Bank
study also reached a similar conclusion. Virtually stagnant prices of
industrial products in the wake of booming demand is one proof of rising
productivity.
Then there
are concerns that demand itself may be dwindling for some products. Already
the sales of certain automobiles, consumer electronics and capital goods
(primarily machine tools) are not growing as fast as they did last year.
But in most sectors what is falling is the growth rate, not the absolute
level of demand. That's a critical distinction. For these are the products
that registered sales growth of 30-40 per cent during most of last year.
It's only natural that the growth eventually slows down to a sustainable
pace. "Till now, this year is better than last year for most sectors.
If some industries do seem to be underperforming, it is because their
growth rate this year is moderate compared to the exceptionally high growth
they achieved last year," clarifies Dilip Chenoy, senior director
with the Confederation of Indian Industry (CII), who has just concluded
a 118-sector survey of production, sales and exports. Incidentally, it
was the CII survey which was interpreted by some as the forebodings of
an overall economic slowdown.
The level
of sentiment also defies any such fears. Dun & Bradstreet's (D&B)
latest Business Optimism Index reflects a spurt in business sentiments
with a majority of 2,000 big and small companies surveyed predicting a
pick-up in sales, profits and employment in the quarter July to September
2000. "The survey revealed an unprecedented upsurge in optimism,"
says Rajesh Mirchandani, managing director, D&B, south Asia. However,
another barometer of business confidence, the NCAER's Business Confidence
Index, shows a marginal dip in sentiments in June 2000 from its five-year
high level in April 2000. Even after the blip though, sentiments remain
the highest since December 1995.
The economy
will continue to do well as long as consumers -- both urban and rural
-- don't desert the market. Right now there are no indications of that
happening. Not only are jobs and incomes buoyant and the monsoon seems
on course, but there are also structural changes strengthening consumer
demand. One such change is a faster growth in family incomes. Average
household incomes have risen faster than individual incomes due to an
increasing number of women taking up jobs.
The trend
has been boosted by another structural change in the Indian economy --
the emergence of services as the pre-eminent sector of the economy. The
sector today contributes nearly 50 per cent to the national income --
up from 29 per cent in the 1950s. Services have the maximum scope for
informal jobs and self-employed businesses convenient for women. More
importantly, the growth in the services sector has imparted stability
to the overall economic growth by reducing the share of agriculture which
is still impacted by the vagaries of weather. Says Madhavan: "Services
sector growth has been a big qualitative improvement in the economy."
Also, unlike
agriculture and industry, the services sector is less dependent on the
government. Observes Ashima Goyal, associate professor at Mumbai's Indira
Gandhi Institute for Development Research (IGIDR): "A major qualitative
change is the sense of new opportunities and rewards for effort. The old
trap of dependence on the government for everything is giving way."
But one
factor that casts a shadow over all the qualitative and quantitative advancements
is the stubborn deficit in government finances. At Rs 1,08,898 crore (or
5.6 per cent of GDP) in 1999-2000 the deficit shows no signs of relenting.
Apart from keeping the interest rates high (government borrows to fund
the deficit), the continued government bankruptcy has held back any chances
of big-time public investments in infrastructure. Worries Bhide: "We
do not have the infrastructure to accommodate high growth on a sustained
basis." Even with these problems though most experts do not expect
the economic growth to fall below 6 per cent a year. Professes Goyal:
"If we get some things wrong, we will grow by 6 per cent. If we get
most things right, 10 per cent growth is a real possibility." This
optimism, more than anything else, is the reflection of the qualitative
change in the 1990s.
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