A dream sours as poor demand, high interest rates and lack of investor confidence hits growth and slows the economy.

By V Shankar Aiyar and Shefali Rekhi

It was a quintessential power lunch, the air thick with the talk of thousands of crores of rupees, overpowering the appeal of cologne and biryani. Prime Minister I.K. Gujral -- who hosted his first meeting with industrialists last week at the capital's Vigyan Bhavan -- was not present at the lunch. But he was a picture of attention through the working hours, flanked by his economic ministers and facing an army of ceos whose companies account for most of India's market capitalisation.

Gujral, though an ex-businessman, is not known for his interest in economics, foreign affairs being his forte. However, the interactive session was convened on a note of urgency that had to override the prime minister's intellectual preferences. He cupped his ear to follow the nuances of corporate arguments. At the end of the day, he was ready with a "package" that contained promises rather than decisions.

The industrialists could at least hope that the wheel of the economy would spin again on some other day. But for Gujral, it was swim or sink. If the economy continues to slow down in the second half of 1997-98, it will put paid to the Government by the 14-party coalition, not to speak of Gujral's fancy "doctrine" on foreign relations. Perhaps having felt his boss' pulse, Industry Minister Murasoli Maran yelled at the audience in his characteristic "quick gun" style: "Don't give us long-term projections. Confine yourself to the October-to-March period. Leave further expectation to the next budget."

Gujral and his two finance aces, Maran and Finance Minister P. Chidambaram, have every reason to feel the heat. The onset of an industrial recession is strongly in evidence. Shops are bursting with stocks of unsold premium consumer goods. The sluggishness in the consumer industry, including cars, has spread to basic and capital goods. Examples:

• Whirlpool of India, predominantly a maker of refrigerators, has, after a gallant beginning a few years ago, recorded a negative growth of 8 per cent this year.
• Ashwani Windlass, ceo of Max Touch, reports a 40 per cent gap between usage of air time on cellular phones and the projection of operators.
• In the automobile city of Pune and in Lucknow and Jamshedpur, telco's despatch yards today resemble a graveyard. The stockpile of vehicles was 4,177 at the end of March; it is 16,544 now.
• Commercial vehicle sales were down by 19.3 per cent between April and July. Mahindra Ford pruned production from 55 cars a day to 40.
• Demand for cement, a trusted index of economic growth, has taken a downturn. In Mumbai, a 50 kg bag of cement, selling for Rs 172 in June, is now fetching only Rs 150. Even then there is hardly a queue of buyers.

Much of Chidambaram's self-confidence of the budget days has disappeared. The budget, which drastically cut tax rates in the hope of firing the engines of growth, was a triumph of optimism over despair and cynicism. Eight months later, his "supply side" experiment is headed for a rout.

The experiment itself had very little theoretical foundation. Its central assumption: if small tax increases can have huge negative effects on the economy, tax reductions could correspondingly have huge positive effects. Chidambaram lowered the marginal tax rate from 15 per cent to 10 per cent, and the top tax rate from 40 per cent to 30 per cent. Peak customs duty was down from 50 per cent to 40 per cent. Excise duties were lowered across the board through rate rationalisation and amendments in the Modvat scheme.

Chidambaram offered the taxpayer more than he could have asked for. Tucked in the gift package was a tax amnesty scheme that promised to forego all past evasions. Behind these bonanzas was an expectation that low taxes would rekindle the incentive to produce more -- and thus to pay more taxes with less difficulty.

The real world of money turned out to be a lot more cruel. Industrial growth for the first quarter of the current fiscal year was 5.2 per cent, against 12 per cent in the first quarter of the previous year. The manufacturing sector moved up 4.8 per cent in the first quarter of fiscal '98, against 15.4 per cent a year ago; export growth was only 6 per cent, turning the robust growth figures of 17-21 per cent in each of the three fiscals between 1993 and 1996 into history. In the financial sector, banks were lending to the Government alone, with such lending crowding out private borrowing. Worse, the first-half collection of both customs and excise revenue fell far short of expectations. The Finance Ministry tom-tommed a rise in advance direct tax collections at the end of the first six months of the financial year. But its rise of around 13 per cent paled in the context of the supply siders' hope that lowering of tax rates would trigger the incentive to earn a lot more and pay exponentially higher taxes.

As investment has taken a seemingly irreversible nosedive by the end of the second quarter, the stock markets have become a nightmare for the investor. On every trading day, there are three or four times more scrips recording "new lows" than those touching "new highs". Earnings are down, and so are price expectations. The lack of confidence in the secondary market has seeped into the primary market. In the first half of fiscal '98, the money raised through primary issues was only Rs 360 crore, a measly 6 per cent of the previous year's low figure of Rs 6,000 crore.

But the worst damage that a limping economy could inflict is on business confidence. Eight of the 11 top CEOs who responded to an india today questionnaire said the 1997-98 budget had failed to live up to its promise. Though seven of them foresee a turnaround this fiscal, the pessimists are significant for the markets in which they operate. Two of them, Venu Srinivasan of TVS Suzuki and T.P.G. Nambiar of BPL, sell two-wheelers and consumer durables respectively. Deepak Parekh of HDFC is in the housing credit business, while L.M. Thapar of bilt is the pasha of paper. But cutting across the lines of risk appetite, the respondents have given their verdict on two issues: the economy has not turned the corner and the budget has been a big let-down.

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