From Green To Orange

AMIDS Tbuoyant Government estimates of a 7per cent economic growth last fiscal year, topped by expectations of 6.6 percent in the current year, the first signs of a deceleration may be trickling in on the industry front.After clocking a remarkable recovery in the last three years—6 per cent, 9.3per cent and 12.1 per cent—will industrial growth fall below Finance Ministryexpectations of 10 to 12 per cent this year?

Industry has contributed handsomely to the speedy economic recovery in thepost-structural adjustment. The first two years of the Narasimha Rao governmenthad little cause for cheer to industry—the balance of payments crisis broughtimports to a virtual halt, while high inflation crushed whatever little demandwas left alive. But it was quick to cash in on the tariff reforms andliberalisation. Says Rakesh Mohan, director-general of NCAER: "In the lastthree years, we have made a very successful recovery. The question is whetherthat can be sustained. All indications are that the industrial growth is a verysustainable, reasonably high trend. But the best proof of that can be probablyfound at the end of the decade."

 In the meantime, the numbers are worrying.Early fears may not catch the worm, but the signals are going on the blink onthree shores. Industry is buying less capital goods—machines to manufacturetheir products; the infrastructure—especially power generation, which isactually declining—isgetting more ramshackle by the month; and industry’s sources of funds remainchoked. 

Worry No 1:Primarily,capital goods. The first quarter of this year (April-June) saw a sharp fall incapital goods imports, rising by only 12 per cent compared to 52 per cent in thesame period in 1995-96. Sectors like electrical machinery, transport equipmentand project goods recorded negative growth rates.

Over the last six years, even after taking into account theworst dips during1991-94, capital goods contributed the maximum—almost a third—to the surgein industrial growth. Last year, the rupee value of capital goods imports rose72 per cent, while production grew by 50 per cent. But the production index ofcapital goods started moving downward from December 1995, when growth was 26 percent, and ended March with only 13 per cent. It has picked up thereafter, but ona point-to-point basis, output growth has clearly fallen behind. Compared to25.8 per cent averaged in first quarter 1995-96, it has hovered around 18 percent in April-June. Says Isher J. Ahluwalia, professor at the Centre for PolicyResearch: "The recent high growth in thissector is a result of investmentsmade over 1992-94 and high import growth." 

This year, however, the index ofindustrial production (IIP) has averaged less than 10 per cent growth, comparedto the previous year’s first quarter average of 14 per cent and second quarteraverage of 11 per cent. Despite sharply lower growth in consumer goods andcapital goods sectors, the manufacturing sector has managed to keep up thepressure, only to be taken over by a dismal performance by the core sector, theunderpinnings of a buoyant industry.

  Worry No2: Basic core industries growth was down 40 per cent in the currentfirst quarter over last year. Output growth has almost halved in saleable steel,and is negative in fertilisers and crude oil, although cement and coalhave looked up. With constraints of their own, freight movement by rail and roadand at ports has shown modest growth. The poor growth in transportation lastyear was quite out of tune with the bright industrial picture.

But the worst scenario is electricity. Power generationgrowth has declined steadily throughout last year, and the trend continues.Mainly because of a hydel debacle, electricity output is now growing at anegative rate compared to first quarter 1995-96, when it averaged 12 per cent.Power generation, experts say, has a high positive correlation with industrialoutput. Without a matching rise in power supply, a high industrialgrowth cannot be sustained over the medium term. The uniqueness of the recentindustrial boom lies in it being accompanied by very poor core sector growth sofar, almost in the same way as the growth in gross domestic product has beenachieved despite steadily falling agricultural growth.

But for how long? The updated Economic Survey 1995-96says the steadydecline in generation "points to the urgency of power sector reform".Ministry sources agree that a minimum of 13-14 per cent growth in power supplyis needed to sustain a 10 per cent industry growth. Adds Ahluwalia: "Tosustain industrial growth at the current levels, beefing up infrastructure is amust."

Worry No 3: TheGovernment can start removing the bottlenecks in infrastructure, but needs heavyfunds flow to lubricate the passage. And funds are scarce right now with both theGovernment and the private sector. With a fiscal deficit high enough to invitemoves of legal ceiling on Government borrowings, the Centre has skewed thecredit market. The rate of interest has remained high for such a long time thatthe credit crunch, long dismissed by the Reserve Bank of India as mythical, hasfinally begun to tell on industry.

Commercial bank credit to the Centre has beenrising since last year. Over the past 12 months it has grown by almost 20 percent, while bank credit to the commercial sector has stagnated. Compared to Rs3,380 crore at the end of June, it was Rs 3,420 crore at the end of July.Industry could be facing a serious funds shortage, with other capital sourcesoffering few worthwhile options.

 As far as overseas capital issues wereconcerned, 1995-96 was pathetic; GDR issues mopped up only one-third the amountraised in the previous year. And the easiest route for raising capital, theprimary market, has been dormant for all of last year. Funds raised by newcapital issues were only half that of the previous year. The story has continuedthis year, with the Bombay Stock Exchange Sensitive Index much lower now than atthe same time of 1995. The recent emphasis on debt has almost coincided with abattle all but lost on Dalal Street.

According to an ICICI study of private corporate sectorunaudited results in 1995-96, while gross profit grew slower by a quarter—by30 per cent compared to 45 per cent in 1994-95—interest costs more thantripled from 8.4 per cent to 28.4 per cent. With other income slumping,operating profit growth was more than halved to only 31 per cent. With tax outgoslated to go up, the current year doesn’t look too profitable for thecorporate sector.

The biggest worry of all is that despite the uncertaintiesprevailing, high interest rates will continue. This is implicit in the latestRBI report. Plagued with bearing the burden of devolvement of governmentsecurities issues and keeping current account deficits low, the RBI is inclinedto check investments. That is already reflected in the petering out of thecapital goods sector boom.

Says Ahluwalia: "The ’80s were a period of highindustrial growth but it was clear it could not be sustained as macro-economicmanagement was not efficient enough." The ’80s recorded a compoundedannual growth rate of 7.8 per cent, higher then even the ’60s with littletariff protection. Gross value added in the manufacturing sector grew at 7.6 percent at constant prices of 1980-81. But the gains were wiped out by the fiscalcollapse at the end of the decade. The situation may be better now, but it couldbe risky to ignore the primary warning signals.