Beginning To Look Up

IT’S that phrase again! That f-word once more, back from ignominious exile two years after it skulked away from our vocabulary. It’s the "feel-good factor". It swindled us in ’94, when foreign institutional investors pumped money into the bourses and Indian industry seemed poised for vertical take-off. What we got instead was a recession as Manmohan Singh squeezed money supply and turned Indian industry’s playing surface from astroturf to slush. It hoodwinked us again in ’97, when P. Chidambaram’s tax-slashing budget seemed just the right medicine. But it soon became obvious that his budget was about six years ahead of its time; that though cutting taxes was good, cutting government capital investment given the current structure of the Indian economy was folly.

Is it the real thing this time? We at Outlook, at the risk of having to eat our words some months down the line, have decided to go out on a limb. Yes, it’s the real thing.

The numbers first.

Now the qualifiers. Remember, all these increases are over some pretty dismal bases. Yes, industrial production is up, but, as Anil Singhvi, executive director, Gujarat Ambuja Cement, points out: "Last year, production during the same period was almost at its nadir." Yes, customs duty collections are up 12 per cent, but, says Singhvi, "this is mainly on account of import of oil whose price has exceeded $17 per barrel from the low of $10 per barrel last fiscal year". The cess on diesel has jacked up revenue collections, but the money has to go the Road Development Fund as intended, instead of disappearing into government coffers as has happened before. But even Singhvi, the most pessimistic of the two dozen businessmen, economists and stockmarket experts we met for the story, admits that "the economy this year is going to do better than last year".

Reactions from the others we met ranged from cautious optimism to gung-ho cheer. "Just look at the sheer figures," says economist Omkar Goswami. "Cement, steel struc-turals, automobiles, trucks, motorcycles, fast-moving consumer goods and a whole bunch of sectors are on an upswing. This is because of the demand-pull factor caused by two bumper agricultural seasons."

This time, it’s rural India which has moved the economy from first gear to second. Visit any village, and the signs are there to see. At Bhadat in Punjab’s Ropar district, sarpanch Dharam Singh has made a profit of more than Rs 200,000 this year from his 15 acres. He had a fridge, a scooter and a cooler. Recently he’s added on a telephone and exchanged his black-and-white TV for a colour 21-incher. Next door to him, Puran Singh, who owns 21 acres, complains ceaselessly about his lot, but admits he is in the process of buying a fridge and a scooter and will be investing in wheat and potato sowing machines very soon.

In village Dukhode (population: 4,000) in Haryana’s Ambala district, there are now 200 telephone connections, 80 per cent of the households own TVs, 70 per cent own coolers and 40 per cent scooters. The figures were quite different two years ago. Thakur Kuldip Singh owns 40 acres. He has every consumer durable now except a washing machine, which he has not bought because the area has a water problem. Next year, he hopes to upgrade from his motorbike to a jeep. In Lalru village in Patiala district, the owner of Rajinder Sales has seen his colour TV sales rise 30 per cent this year. He has even begun selling 10 to 12 washing machines a month! At Hind Motor Store at Baldev Nagar in Ambala, manager Baldev Singh is pleased with business: "There’s been an almost 10 per cent rise in sales of scooters since last year. Even women are riding scooters in large numbers here."

Says A.K. Jain, president (marketing), ACC: "The upsurge has been clearly driven by our agro-based economy. In Uttar Pradesh, our sales have grown more than 35 per cent. Agriculture remains the main income generating sector in Uttar Pradesh. So, the link between increased construction and bumper harvest for two successive years is clear." "Tractor sales are rising, as are commercial vehicles. April to June, tractor sales have increased 7 per cent over last year’s first quarter," says Anand Mahindra, managing director, Mahindra & Mahindra. "Our sales have risen 14 per cent. It seems the economy is finally on an upswing." Now if the rural boom is joined by an urban upsurge, the agricultural ascent by industrial resurrection, the economy could move into fourth gear, even overdrive.

THAT is significant is that across the country, cement sales are up 23 per cent, commercial vehicles 34 per cent and consumer durables nearly 19 per cent in April-June ’99 over April-June ’98. Cement means construction, which has a multiplier effect on a host of other industries. When you buy a house, you buy an economy. You buy fans, flooring, furniture, consumer durables, maybe even a car. The demand for commercial vehicles means there are more goods to transport. And higher consumer durable sales imply the consumer has regained enough faith in his economic future to convert his liquid money into concrete assets. Sushil Ansal, director, Ansals Housing, claims real estate sales are picking up rapidly: "Over Rs 450 crore of property in the high-end sector (office complexes) was sold in ’98. It’s expected to cross Rs 600 crore this year. Residential real estate too is looking up. Our residential apartment bookings have increased more than 25 per cent." Premier housing financier HDFC’s disbursements were up 25 per cent in April-June over the same period last year. Clearly, Yashwant Sinha’s budget sops for the housing sector are paying off.

The country’s three biggest industry associations are bullish. "Yes, there seems to be a real industrial upturn which started three months ago and is being maintained," says CII director-general Tarun Das. "Orders are up, capacity utilisation improving and exports rising." "There is a real economic upturn, but there’s some way to go before we find this translated into a boom," says FICCI secretary-general Amit Mitra. And Asso-cham’s deputy secretary general Anjan Roy told Outlook that a study they’d conducted soon after the fall of the Vajpayee government showed there was no change in the economy despite the failure of the confi-dence motion. "This was because there was this feeling that the process of liberalisa-tion had set in firmly and the economy was in fairly robust shape," says Roy.

But what are the reasons for the upturn which is also clearly reflected in the stockmarket boom? One is of course the logic of economic cycles, which have a way of troughing out and then rising again. But a critical reason for the coming industrial rejuvenation is that many companies, with their backs to the wall a couple of years ago, have got their acts together. They have hived off loss-making ventures, downsized staff, cut costs, become more efficient and competitive. Even those which seemed no-hopers a year ago, like Thapar flagship Ballarpur Industries or TISCO, have purged themselves of bad businesses. There are of course enough business groups which haven’t restructured and consolidated, but the configuration of the Indian economy has changed enough since ’91 to make sure that the unreformed have far less chance now to get fat on freebies and slow things down.

THE bourses recognise this. Says Ashok Kumar, president, Lotus Strategic Consultants: "Better companies which have survived the recession are now better-equipped to cash in on the growth of the economy. Hence, corporate results should get better. Though only software firms are coming out with public issues, there are indications of the primary market gathering momentum. That is when the stockmarkets and retail investors will both join the bandwagon." Says Nikhil N. Khattau, CEO, Sun F&C Asset Management: "The first stage of liquidity is in the banks. From the banking system, it goes to the capital markets. Once retail interest moves towards the capital markets, liquidity shifts to the general economy by way of increased investments by industry. We are witnessing the first stage, which is gradually progressing towards the second stage. Retail liquidity is moving from the banking system towards the capital markets, mainly through mutual funds. Once the capital market sustains this interest, liquidity will move to industry. That will be the real turnaround which now seems inevitable."

The current rally, say experts, is also very different from the "feel-good-driven" ones of ’94 and ’97, which petered out fast. Ridham Desai, India strategist, JM Morgan Stanley, sees three critical differences between the ’94 Sensex surge and the ’99 one. "Sustainability of economic growth, cheaper valuations and favourable demand-supply for equities," he lists. "The recovery in economic growth is being driven by consumption and infrastructure activity, unlike ’94, when it was mainly driven by capacity creation in the manufacturing sector."

And what about the post-Kargil feel-good factor itself? How much is that responsible for the coming economic boom? "For any nation facing an incursion into its territory, it is bound to upset business and economic sentiment," says Sony India president Hiro-mi Matsumoto. "India emerging victorious in Kargil will contribute greatly to strengthening the feel-good factor in the economy." Says Assocham’s Roy: "The feel-good factor is basically an economists’ perception but given the current trend, I don’t see any other way to explain the economy."

Economist Shubhashish Gangopadhyay says it is the feel-good element that’s buoyed up the economy. "Kargil reflected that there is a larger support for India in international fora—both diplomatic as well as economic," says he. "The West has been impressed by the way New Delhi handled the situation. Multinational corporations are aware of the fact that the nation has had three elections in the last three years but India retains its basic stability. This, in turn, helps develop business. And this is precisely what is happening." But what will be the effect of the inevitable increase in defence expenditure? Could that raise the fiscal deficit beyond the danger mark? Yes, says FICCI’s Mitra, but "if the expenses are one-time and met either from a cut in expenses elsewhere or some one-off revenue-raising measure, the adverse effect can be contained." CII’s Das feels that increased defence spending will not affect the economy adversely if economic, and industrial growth is stepped up and this can certainly be achieved.

The other blot on the horizon is of course looming elections. What if India yet again doesn’t get a stable government? "Despite the widespread feeling that with the introduction of a market-driven economy, the close link between economics and politics in India has loosened a lot, the fact remains that we need a stable government to push through important, long-pending measures," says Mitra. Das agrees: "A stable government will reinforce the feel-good factor and strengthen India’s image for purposes of investment and business." Mahindra, though, sees the economy booming, "the forthcoming elections notwithstanding". "It could be a dampener only for a few months," he says. But, after a pause, he adds, "At least we hope so."