Don't Panic

IN Douglas Adams’ five-part trilogy The Hitchhiker’s Guide To The Galaxy, the most useful book in the universe has, on its cover, just two words, the most useful message in the universe: "Don’t panic". Right now, as far as the Indian economy is concerned, that, apparently, is the toughest thing to do. It is, also, almost the only thing to do.

There is no better indicator of the confusion that appears to have gripped Indian industry, policymakers and consumers than two press statements issued recently by the high-profile Confederation of Indian Industry (CII). On December 4, the CII released the findings of its latest Business Outlook Survey. The findings exuded optimism from every pore: industry expected orderbook position to improve, value of output to rise, capital expenditure to go up, rate of return on capital to increase, employment and exports to climb in the next six months. A definitely rosy picture. But the next day, Shekhar Datta, CII president, in an unusually strong-worded statement, expressed "serious and deep concern about the short-term outlook"(!).

He said: "There is an urgent and critical need for the Government to take steps to arrest the decline in the economy as well as the decline in confidence levels and bolster the image of the country and the corporate sector. The time to act is now." "That was an intemperate outburst," was how a senior Finance Ministry official dismissed Datta’s statement, while talking to Outlook. "We’ll have 6 per cent GDP growth this year. Industry will grow by about 9 to 9.5 per cent, services by 6 per cent and agriculture growth will be 3.4 per cent compared to less than one per cent last year. Forex reserves are up in the last six months from around $17 billion to $19.3 billion. We’ll end up with a fiscal deficit of 5 per cent. For the first time, the Budget had an actual decline in revenue deficit. Ad hoc borrowings have come down. So where’s the slackening of growth?" But no one appears to be listening. The Sensex on The Stock Exchange, Mumbai (BSE), hit a three-year low on December 3. Market capitalisation (the total current market value of all shares) on the BSE had come down by as much as 28.31 per cent, or Rs 169,191 crore, since April this year. And on the international bourses, market capitalisation of Indian Global Depository Receipts (GDR) fell by an incredible 39 per cent between June 4 and December 4, sending the Skindia index down to an all-time low.

The news seems to be bad all around. Latest estimates show that India will miss its $38-billion export target for 1996-97 by $2 billion. And non-oil imports between April and October were down 20 per cent over the corresponding period last year. Since non-oil imports are mostly industrial raw material, components, bulk commodities and capital goods, this means that industry has put the brakes on expansion plans and new projects, if not actually axed production. Gold prices have plunged to a three-year low in London, pulling domestic prices down by 6 per cent to Rs 5,320 per 10 gm. In Delhi’s central business district, Connaught Place, real estate brokers claim a 30 to 40 per cent drop in commercial property prices in the last year. The advertising industry, a bellwether of the level of confidence in the consumer markets, fears a growth of only 10 per cent compared to its annual record of 30-40 per cent. Corporate India appears to have hit the red button: salaries and perks are under heavy pressure, and retrenchment has begun, even at top manager levels. On Mumbai’s Marine Drive, the city’s most expensive hoarding which almost throughout the year rolls out ‘earnings per share’ has a new look. A banner covers it, shroudlike, pushing the polio programme. And the dreaded R-word—recession—is a whisper wafting louder.

Don’t panic. For there’s no reason to. Panic now would be as irrational a reaction as the euphoria that gripped the nation from 1992 to 1995.When every company announced Vision 2000s and mega-projects clearly beyond their levels of incompetence. When transnational corporations (TNCs) rushed in rupee-denominated dollar-priced products in pursuit of that chimera of a 200-million-strong middle class. When salaries and incomes appeared to be on a one-way road heading straight up, endlessly. "The economy had overheated itself," says Partha-sarathi Shome, director, National Institute of Public Finance and Policy. "The greatest disservice that was done in the past five years was to send the message that reforms were all smiles," says a bureaucrat. "Manmohan Singh started out by saying ‘adjustment with a human face’, then it became a smiling face. Adjustment means pains, making hard choices for the next three-four years. It’s a natural consequence of unleashing the forces of competition."Says industrialist Rahul Bajaj: "The economy does seem to have slowed down, but I do not see any signs of a recession on the horizon. There’s no need for pushing the panic button." Right now though, gloom appears to rule. "The confidence of industry, investors and consumers in the economy is falling," says Arun Bharat Ram, managing director, SRF. "The consumer is putting off purchases of durables like cars and two-wheelers due to market uncertainties." Adds Ajay S. Shriram, managing director, DCM Shriram Consolidated: "I see no positive signs and I don’t feel optimistic, for the next six to eight months."

Strong words, the reasons for which are hidden behind the macroeconomic debates on fiscal deficits and trade balances. These are the ground level issues that hurt. For instance, even though all money supply figures point to an end to the credit squeeze that muffled corporate growth plans over the last 18 months, no one is borrowing. Bank credit to the commercial sector grew by only 1.7 per cent during May to October, over 6.1 per cent last year at the height of the credit squeeze!

Why? With the ‘raid raj’ spectre already raised by the ITC and Shaw Wallace affairs, bankers had been tightening their fists. An RBI circular asking banks to be "cautious" in their lending, has worsened matters. "Banks are flush with funds, but they are not lending enough because it appears that their executives are not willing to take decisions," says Bajaj. Adds R.C. Bhargava, managing director, Maruti Udyog: "If an official makes an inadvertent error, that becomes sufficient ground to hang him." If that’s the experience of the chiefs of two of India’s bluest blue chip companies, the chances of a small entrepreneur getting a start-up loan can only be dim.

Last week, in a high-power meeting with bank chiefs, Finance Minister P. Chidambaram urged them to take risks while lending, and aggressively compete with one another to woo creditworthy clients.

The other aspect to lower borrowings is that the financial institutions (FIs), starved of funds, have raised money from the public at interest rates of 17-18 per cent. Naturally, they cannot now lend those funds at less than 21 per cent or so. And industry is not interested in such high-cost funds. It would rather wait.

One reason to do so is "political instability". The contradictions within the ruling 13-party coalition and the tenuousness of Congress support worry industry and investors. "The Government is a prisoner of the Left parties and the Left is like a prehistoric monster—a dinosaur," says economist S.L. Rao. "The contradictory signals from the Government have made the picture hazy and confusing," says Subodh Bhargava, CEO, Eicher Group. Even Shome, chairman of the resources working group in the Finance Ministry, admits that "there are mixed feelings, even disagreement within the Government, so we still don’t have a strong policy drive to get foreign investment." 

Add to these factors the Minimum Alternate Tax (MAT) introduced in the Budget to make sure that all profit-making companies pay some tax. The signal that MAT has sent out is that this Government is somehow unfair when dealing with industry. On the one hand, it maintains the over-hundred tax breaks that have continued for years, allowing astute corporates to be zero-tax, and on the other it decides to tax them arbitrarily anyway. "The Government will possibly make Rs 3,000 crore from MAT this year. But it has lost over Rs 100,000 crore in market capitalisation," says the chief of a finance company. "MAT is the singlemost reason for the stockmar-ket collapse. Now the Government can’t disinvest in the public sector units (PSUs) because with the markets so low, those issues will either fail or get a price far lower than their worth." Last week, after Prime Minister Deve Gowda almost admitted at FICCI that MAT was a mistake, stock prices revived briefly, but fell again when punters realised that Gowda had not made any concrete promises. It’s unlikely that MAT will go. Simply because it may have become an ego issue between Government and industry, especially with Manmo-han Singh now chipping in and blaming MAT for the stock slump.

Nothing scares the common man more than a stockmarket in free fall. His first reaction is to postpone all but essential purchases, to maintain liquidity. Which may be already down, because he’s taken a loss in the market, or because he can’t sell at the current low prices. Result: panic among marketers who rush in with discount schemes. "What is causing anxiety is the slackening of demand in November, a month that’s generally considered peak time," says Subodh Bhargava. "In 1996, we have experienced a slight negative trend in the white goods sector," says Craig Ibsen, vice-president, Electrolux. "The colour TV market has not lived up to the expected growth rates of 20 per cent," says R.K. Caprihan, deputy managing director, Samsung Electronics. "Expectations are that CTV sales will show a marginal growth of 5-10 per cent over last year." The consumer markets look like a vast garage sale (see The Great Indian Garage Sale).

Why shouldn’t we then not panic? Well, for one, everyone agrees that industrial growth will be between 9 and 10 per cent. "That’s lower than the 12-13 per cent of last year, but it’s fairly good growth nonetheless," says Bajaj. "Though industrial growth has been less than last year, agricultural growth is likely to be 4 per cent, which is substantial," says U.R. Bhatt of Jardine Fleming. "The pessimism is unwarranted as most people normally tend to look no further than their noses."

The truth is that a heady 13 per cent industrial growth rate is unsustainable in the long run.

So why is industry worried? "Because competition is beginning to hurt, profit margins are being squeezed. There’s now a takeover code. No longer will the Government protect you. Industry is being held more accountable—a few days ago, minority shareholders forced a change in the holding pattern of Sandoz-Ciba Geigy. This is unheard of in India," says a Finance Ministry official.

Many feel that the capital markets are refusing to look up because they have been abused by unscrupulous promoters in the last three years. But now, no longer can one raise money for, say, buying land in Nariman Point. And if small investors have lost faith in corporate India, why blame bankers? "The fault also lies with borrowers who fail to establish their creditworthiness. The balance sheets do not give the correct picture," adds R.C. Bhargava.

Why are corporate leaders, who have been hailing the opening up of markets and the unshackling of industry, suddenly running to the Government? If FIIs are allowed to come in and invest in Indian stockmarkets, logically they should also be free to sell their holdings just like any other shareholder. If the Sensex crashes because of that, isn’t that the flip side of competition and open markets? Anyway, the financial year for FIIs is January to December, so towards the end of the year, FIIs sell, and book profits.

As for the consumer market, "the depression is a creation of wrong estimates," says Rao. "Most of the players overestimated the number of those with buying power for costly consumer products." Adds Rajesh Srivastava, vice-president, marketing, DCW Home Products: "Many TNCs unrealistically multiplied the dollar price of their products by 35 and launched in India. Secondly, many TNC brands have not advertised for the Indian customer, but depended on an overflow from their international advertising. Brands like Pepsi, which Indianised their advertising, are not in trouble. Thirdly, TNC managers are heavily numbers-driven, which may not be the best way to work in India." While there are still vast unsaturated consumer markets in India, these are not large enough to take in four brands of Rs 36,000 refrigerators, or seven brands of over Rs 5 lakh cars.

Lastly, the Government report card. "The truth is that the reforms had completely stopped after two years," says Shome. "There was a hiatus in exchange rate reforms, administered prices, share of revenues. Chidambaram has taken more meaningful measures than any taken in the last two years of Manmohan. I’d like to give this Government its due. It has taken stabilising measures which were long overdue—like the petroproduct price hike, a bold public expenditure policy—and it’s getting the flak for it."

Of course, much remains to be done. The commissions on expenditure and tariff have yet to see the light of day. A Disinvestment Commission has been set up but it’s not being allowed to function freely. Government spend has to be cut drastically, fast. Above all, something has to be done quickly about the outdated legal framework and creaking infrastructure. Can this Government do it? "There are just too many parties involved in decision-making. Even if the intentions are good, no bold enough measures are possible," says Alok Sethi of NatWest. But look at it from the other side. Does anyone want to go to the elections again, soon? Can the Left stalk away from the UF? As long as the spectre of the BJP exists, this coalition could hold together. Maybe even for five years. If Narasimha Rao and Manmohan could take their boldest decisions in their first two years in power as a minority government, why not the UF?

Maybe. Maybe not. But this is a transition phase we had to pass through anyway. We expected reforms to solve all our problems,and behaved irresponsibly and unrealistically. In the stockmarket, a euphoria always leads to a technical correction and the market backtracks, often to lower than its true worth, and rises again to find its true level. The economy is going through a similar phase. "I think we have gone through the worst and we expect the cycle to turn," says Alok Vajpayee of BZW. But even the biggest cassandras would agree that the inherent strengths of the economy will not allow it to be pushed into recession.

Unless we begin to panic. As in the stockmarket, which crashes when everyone loses faith. But the smartest punters pick up shares when the majority is losing faith. To raise faith, the Government has to show that it has the strength to take bold decisions. If it can push the amended Companies Bill through, if it can get the eight fast-track power projects going, if it can get the telecom privatisation process off the ground, everyone across the world would sit up and listen. 

The cellular phone has, rightly or wrongly, become a symbol of liberalisation. One of the men who invented the cellphone, Martin Cooper, currently chairman of ArrayComm Inc, was in India last week. "We’ve had cassandras of doom even in the US," he says. "They’ve been predicting the doom and crash of the stockmarkets for the past three years. Any talk of slowing down of the Indian economy may just be temporary. There is generally scepticism about politicians, but some of them may want to do what is right for the country. And India has an intellectual infrastructure superior even to the developed world." It’s up to the politicians now to prove whether Cooper is right. But those who are intellectually superior do not panic.