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COVER
STORY: ECONOMY
Warning
Signals
Halfway
on its path to recovery, the economy is displaying signs of a slowdown.
Here is what's wrong in the economic landscape and what lies ahead.
By
V. Shankar Aiyar and Rohit
Saran
Here
is a probable crorepati question: What is the state of the Indian economy?
A: Good
B: Average
C: Bad d: Ugly
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| While
rural incomes have been sluggish, urban consumers have postponed purchases |
Since
pondering over the state of the economy isn't the favourite pastime of
most people, chances are the contestant will go in for the audience poll.
And what would he get? A split verdict, but with more votes for average
and bad, than good. Among the more discernable economy watchers the verdict
is clearer. An early winter frost is setting in over the economy. The
"feel good factor" in the economy that Union Finance Minister
Yashwant Sinha had taken credit for seems to be fast vanishing, leaving
the economy shivering at the prospect of a chilly fiscal year.
The Business
Confidence Index of the Delhi-based National Council of Applied Economic
Research (NCAER) -which measures the optimism of companies-fell a full
15 points in October, from its level in June this year. Business expectations
had touched a five-year high in April 2000, just a month after Sinha presented
this year's budget. And why not, after all Sinha had ended his budget
speech with brave words like, "The world's eyes are upon us and we
will deliver." The outlook got brighter and sunnier in the summer.
The Mumbai-based Centre for Monitoring Indian Economy (CMIE) put out its
highest forecast ever for the national income growth-7 per cent in 2000-2001
over 1999-2000. The NCAER too predicted more than 7 per cent growth. Both
have recently pared their forecasts to 6 per cent or less.
Why has
the optimism evaporated so soon? Don't bank on business to get a coherent
answer. Depending on whom you ask, the reasons can be less-than-normal
monsoon, higher prices of petroleum products, high cost of capital, influx
of imports, rigid labour laws and poor infrastructure. But the fact is
that most of these obstacles have been around for years, if not decades.
If the business isn't suddenly sanguine about the future, it has to be
because of something more immediate. Says Arun Bharat Ram, president of
the Confederation of Indian Industry (CII): "It's a mysterious slowdown.
It has crept on us without anybody realising it." INDIA TODAY diagnoses
the slowdown and attempts explanations and solutions.
How
bad is the economy?
It may not come to the worst, but the slowdown in economic growth seems
to be getting severe with each passing day
It may not
be a recession as yet but sentiments across the spectrum of industry and
services are pessimistic. Avers Rajeev Chandrashekhar, director, BPL:
"It's one of the bleakest quarters." Adds Gautam Singhania,
chairman, Raymonds: "We are bullish but the going will only get tough
because the market is not growing." These sentiments echo the news
from the assembly line. Between April and August this year, production
of manufacturing industries grew by only 5.5 per cent over the same period
in 1999. Last year, it had grown by 6.1 per cent. The worst hit are commercial
vehicles (mainly trucks), machine and tools, cement and automobiles.
The slowdown
has affected industries in two ways. While some have suffered an absolute
fall in production and sales, most are witnessing a decelerating growth
rate. For instance, colour television (CTV) sales so far this year have
been higher by only 5-6 per cent over last year's level though they had
surged by over 30 per cent in 1999-2000. Similarly, car sales since April
this year have stagnated at the same level as last year, logging less
than 1 per cent growth. But in 1999-2000, car sales had spurted by over
40 per cent. Says Ravinder Zutshi, vice-president (sales), Samsung India:
"The past four years of exceptionally high growth had bloated our
expectations. So we aren't sure if the current downturn in the consumer
durables industry is a correction of our expectations or a sign of an
impending slowdown."
A look beyond
industry provides more definitive signs of an economic downswing. Agriculture
production, which shrunk by 1.9 per cent in 1999-2000, isn't likely to
revive this year. With an uneven and scant monsoon, most forecasts do
not expect agriculture to grow by more than 1 per cent in 2000-2001. The
services sector, which now contributes half of India's national income,
isn't in the pink of health either. Construction hasn't taken off on a
scale anticipated last year, leaving industries like steel and cement
with meagre demand. The fallout is countrywide. In Hosur, an industrial
township in Karnataka, factories are surrendering their power connections.
In Punjab, 500-odd rolling mills and furnaces have been running at 75
per cent capacity for most of this year.
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With
all the noise about the cabinet resolution on dilution of the government’s
stakes in public sector banks, is anyone buying shares of these banks,
asks V. Shankar Aiyar in 