August 24, 1998

With profits falling and sales looking sluggish, the spectre of a long-term recession looms large.

By V Shankar Aiyar and Shefali Rekhi

The symbolism couldn't have been more appropriate. Last week, Ratan Tata, Rahul Bajaj, Mukesh Ambani, Deepak Parekh, Anand Mahindra and Rajesh Shah met 37 MPs from the Finance Ministry's Standing Committee. In an informal chat, lasting over two hours at The Rendezvous at Mumbai's Taj Mahal Hotel, they talked about the state of the economy. As committee chief Murli Deora puts it, "It was the first time that such an interaction took place." With a stifling slide in the economy over the past two years threatening a long-term recession, the corporate captains clearly were a concerned lot.

And not without reason. A CMIE study of the first-quarter results of 548 companies this year shows that barring oil majors, profits of others recorded an increase of a mere 1 per cent. That too, over the meagre rise of 3.7 per cent notched last year. Only those dealing in software, tea, coffee and, to some extent, consumer goods made profits. The core sector shows no signs of any lift in sales. At 5.4 per cent, overall industrial production in the period April-June this year was no doubt higher than the 3.7 per cent recorded during the same period last year. But the figure for June alone grew by only 5.2 per cent as compared to 6.4 per cent last year.

A survey by the Confederation of Indian Industry (CII) of 82 sectors reveals that 31 sectors reported negative growth and 32 only moderate growth with sales below 10 per cent in the first quarter of this year. The most noticeable slide is in capital goods, which implies that large infrastructure projects are still not moving off the drawing board. V.R. Srinivasan, mergers and acquisitions expert, Imperial Finance, points out that "none of the top 20 groups has announced any new project for the past two years. Naturally the capital goods sector will be hit". As badly hit are fertilisers and commercial vehicles. Kotak Securities Institutional business chief Rajasekhar Iyer finds "there is a clear absence of large investment pushing demand".

Indeed, CMIE Executive Director Mahesh Vyas reveals that preliminary results indicate that the rest of the year will be bleak. "I expect sluggish consumption buying and investment. I don't think corporate results will be any better this year," he says. Even oil companies, which have done better this year, are not upbeat about the rest of the year. "Performance is dependent on how the economy will do," says M.A. Pathan, chairman, Indian Oil. "Hopefully, it will do well."

Not many are willing to bet on that. The latest report of the National Council of Applied Economic Research (NCAER) states there will be no industrial recovery in the second quarter this fiscal. It expects industrial as well as real GDP growth to be pegged at around 5.5 per cent. Contrast this with the Government's expectations of an industrial growth of 9 per cent. There are other factors too: exports in the first two months of this fiscal have been negative, with Reserve Bank of India estimates putting trade deficit at 2.2 per cent or $8 billion (Rs 34,400 crore). Thus, if the rupee breached the Rs 43 mark on Wednesday, it is no big surprise. Not only are exports down but inflows too are expected to be lower this year. The NCAER report puts the figure of net inflows at $1 billion (Rs 4,300 crore) but it could well be higher.

There isn't much cheer in the capital markets too. Money raised from the market has plummeted from Rs 13,312 crore in 1994-95 to Rs 3,061 crore last year. The first four months of the current year have seen just 11 issues collecting Rs 898 crore. The quantum of debt in the total money raised via public issues has risen from 19 per cent in 1993-94 to over 63 per cent in 1997-98. Indeed, in the current year (April to July), over 80 per cent of the money raised (Rs 898 crore) is basically debt while equity is barely Rs 176 crore. Worse, market capitalisation has dropped from Rs 5,75,982 crore in April to Rs 4,22,851 crore in August. The market capitalisation in 30 sensex scrips crashed by almost 30 per cent from Rs 2,13,058 crore on August 12, 1997 to Rs 1,48,589 crore on the same day this year.

Not surprisingly, given the bleak scenario, the corporates couldn't couch their anxiety. In the quarterly business confidence survey, NCAER researchers spoke to corporate decision-makers in May and June this year and found the index (with a base of 100) dropping to an all-time low of 68.3. The erosion is 18 per cent over its level in March 1998, making it the steepest decline in the index since 1993. Such changes in confidence levels in turn directly affect investment plans.

The gloom is not just in the manufacturing and investment sectors. Even the service sector is showing negative trends for the second year in a row. High-growth areas like airlines and hotels too are feeling the squeeze. At least three airlines have grounded their operations in the past 18 months while others are struggling to glide over their troubles. Occupancy rates in hotels, which were already at a low of 63 per cent last year, are now averaging barely over 40 per cent. This despite nearly 30 per cent discounts on both room tariff and food and beverages.

Advertising, the other big segment of the service sector, is doing no better. Already labouring under a fall in billings due to cuts in ad-spend, agencies are now battling with defaults. As Ramesh Narayan, chief of the Advertising Club, says, "Apart from large and small cutbacks on ad-spend, there is a definite cut-back on ad payments. Running after monies due is the major work today and business confidence is very low."

However, in some quarters confidence is still high. A day after the last session of Parliament drew to a close, Finance Minister Yashwant Sinha brushed off the dismal figures with his usual "wait for the end of the year" remark. He went on to add that he "will prove the prophets of doom wrong".

The prophets are not yet willing to change their parish. "We are in deep recession," says economist A.M. Khusro, "yet it fails to create any concern." Industrialists at the Standing Committee meeting too expressed similar fears. "While economic fundamentals may have remained strong, the psychological fundamentals have not," said Ratan Tata, chairman of the Tata Group. The crux of the argument for a turnaround was that the country had opened up to the outside world in haste. While the economy was liberalised, the domestic sector was neither liberated nor given time to catch up. In a sense, the sequencing of reforms was untidy. When the issue was raised in 1995-96, the proponents were dubbed as protectionists in a hurry.

Wise counsel did dawn on some sections of the Government but by then a new regime was in place. Former finance minister P. Chidambaram chose to expose the industry to the lowest-ever tariffs to make it more competitive. As a sop, he offered tax breaks when corporates could see little scope for profit. But industry rallied behind the BJP in their quest for power. The new Government, hampered as it is by internal instability and external factors like the crash of the South-east Asian economies and the steep drop of the yen, is yet to deliver the goods though.

To their credit, the corporate captains came to the standing committee meeting armed with a series of corrective steps the Government could take. Mahindra and Mahindra Managing Director Anand Mahindra was most succinct when he said, "The rains outside have more to do with the country's prosperity than corporates." He added that historically the engine for the Indian economy has been government spending but that perhaps with the advent of liberalisation, the Government has pulled out of business too fast. Mahindra argued that "in doing so we cut capital expenditure instead of revenue expenditure". Net result: fall in investment, including foreign direct investment.

It is this problem that most industrialists at the meeting addressed. Some in a macro perspective and others in details. Housing Development Finance Corporation Chairman Deepak Parekh said, "By clearing the existing projects quickly, the Government could trigger a turnaround." He felt housing could be the best trigger available.

Reliance Industries Vice-Chairman Mukesh Ambani painted on a wider canvas. "India's hope lay in agriculture, we should increase investment here." He also minced no words when he said the spectre of recession in the Indian economy was real and that this was now being followed by a global recession that would last for at least three years. "This is a threat as well as an opportunity." In typical Ambanispeak, he pointed out that commodity prices are at the lowest as globally the core sector was touching a recessionary phase. He then asked the committee to push a common economic agenda to take advantage of the low costs.

Whether these suggestions will result in some action at North Block is yet to be seen. "We can suggest all the good things," said CPI(M) MP Gurudas Das Gupta rather pithily, "but the option to act on it or dump it rests with the finance minister." So will Sinha and his A-Team bite the bait or will they simply dump the suggestions? Bajaj Auto chief Rahul Bajaj, ever the optimist, pointed to the silver lining. "You see, it is these gentlemen who have helped writers coin the new phrase rollback. If they wish and will it, anything is possible." Even a "roll forward" -- for a change.

Issue Contents | Write to us | Subscriptions | Syndication

© Living Media India Ltd