Premature Growth Blues?

IT has been the most short-lived euphoria ever. Barely a month after the announcement of a 7 per cent GDP growth in 1995-96, forecasts for the current year are being drastically scaled down, ranging from 6 per cent by the NCAER to 5.5 per cent by financial analysts. Industry is now feared to grow at under 10 per cent, borrowing is hard and expensive, investment demand is low, power is scarce, crude output has slumped, and corporates expect lower earnings. Is the wolf really at the door? Or is it only, as cynics suggest, cry-wolf on the eve of the busy season credit policy?

It all began with the RBI annual report, which warned that the high real interest rates would force down the demand for bank credit and lead to a slowdown in industrial activity. Then the commerce ministry voiced its worries about the marked drop in export and import growth. Forced to react, the finance ministry conceded that the poor growth of infrastructure industries was cause for concern but the numbers were not worrying yet. At The Economist’s Ninth Roundtable with the Government, Finance Minister P. Chidambaram admitted that hard decisions would have to be taken to keep the fiscal deficit at the targeted 5 per cent and growth might slow. Though, to be fair, Chidambaram stuck to his budget forecast of 6.5 per cent.

That the economy is drifting is also clear from the absence of the "feelgood" factors—real estate and shares are depressed, offtake of consumer durables has dropped, and "hot money" is getting hotter. Net investments by FIIs has slumped from $350.8 million in June to $60 million in mid-September, according to SEBI figures. FIIs feel the high real interest rates and the fiscal deficit might pose a real problem. A sentiment echoed by the IMF’s World Economic Outlook, which predicts a setback to the current economic expansion due to rising inflationary pressures and current account deficit. The IFC, World Bank’s private sector arm, has complained that last fiscal year, it invested less in Indian financial sector and infrastructure projects due to serious administrative bottlenecks.

If corporates expect the recent high rate of industrial growth to founder, it’s not without reason (see Outlook, October 2). Assocham Secretary General V. Raghuraman feels that "the current year’s target of 12 per cent can’t be met because funds are scarce." Last year’s credit squeeze has already hit investment. The Bank’s Country Economic Memorandum (CEM) estimates that net bank credit to the Government grew 18.1 per cent, while credit to industry went up less: 16.9 per cent. Business morale is at an all-time low, finds a recent NCAER survey of 441 companies. The NCAER Business Confidence Index, declining since September last year, touched the nadir of 103.5 in August (May 1993=100). Not only were corporates depressed about the business climate, most believed the going would get worse.

This is clear from corporate performance last year: interest costs have increased, receivables to sales is high, inventory is piling up, especially in consumer goods, cables, fertilisers and petrochemicals. Auto sales, a major pointer to industrial prosperity, are down sharply, growing only 19 per cent in April-July over 34 per cent in 1995. Sales of commercial vehicles moved at only one-third of last year’s rate. Naturally, there are few takers for the expensive funds lying with the banks. Commercial credit offtake is static since the start of 1996-97.

The trade front is as bleak. Commerce Secretary Tejendra Khanna told a CII meet recently that export growth has been down by nearly half so far this fiscal year, which makes the 20 per cent target for the year a distant dream. The Federation of Indian Export Organisations (FIEO) has already scaled down estimates to 12 per cent. Not without reason. The four major product groups in India’s export basket—gems and jewellery, leather products, tea and carpets—have moved very sluggishly, contributing to the poor growth of 14.6 per cent in dollar terms in the first quarter of 1996-97 against 28 per cent last year.

The point to remember about the export growth is that the base has widened, making high growth difficult. Secondly, the slowdown began late last fiscal year. This is also reflected in the 50 per cent drop in export credit growth in 1994-95. More alarming, however, is the slump in imports, from 44 per cent point-to-point growth in April to only 2.4 per cent in July (see chart). Last year, higher import of capital goods and machinery went a long way in boosting overall industrial growth.

The manufacturing sector is still growing nicely, but mining and electricity have turned in dismal performances. The NCAER feels "the infrastructure and financial bottlenecks may slow down growth to 6 per cent this year". Lack of funds and reforms have hit the core sector badly. Over April-August, production in power, crude and petro products, steel, coal and cement went up by only 3.5 per cent as against 11.7 per cent last year. The CEM puts per capita infrastructure stock at an abysmal $500-odd in 1993, compared to $18,000 for Hong Kong and $35,000 for Singapore, countries which India is trying desperately to emulate.

It’s also true that the Eighth Five-Year Plan had put most of the infrastructure development burden on the private sector, which did not materialise with the Government failing to spell out policy and administrative frameworks. This is especially true of power and goods movement by rail and at ports. This has started affecting trade. Revenue-earning railway traffic skidded from 11 per cent in December to 4.5 per cent in June. Fall in coal movement forced steel output to move slower by 6 percent over 15 per cent last year. Neglected for a long time, this sector has the potential to become a dangerous blip.

Ministry sources point out that the external signals, though worrying, may not be enough to spell an industrial demand recession. They point out that foreign direct investment is high, agricultural output growth shows promise, inflation is still under control. Demand for credit is expected to pick up, both from industry and government, in the busy season and the banks are understood to be waiting for that to happen. But the gloomy industrial and credit outlook may force the Government to go in for a cut in the CRR, allowing some monetary expansion and inflation. The success of which depends on whether the Government can stick to its own borrowing programme.

Over the last decade and a half, the RBI has deliberately encouraged interest rates to rise on government debt, to make it more attractive for banks. The weighted average interest rate, estimates R.H. Patil, managing director of NSE, rose from 7 per cent in 1980-81 to 11.08 per cent in 1985-86, to 13.75 per cent in 1995-96. But the plan flopped; last year, it had to pick up one-third of the total debt flotation. Banks have not only cold-shouldered gilts, they have also refused to revise rates after the cut in CRR. To prod them more heavily, especially with the current thinking in the Government that inflation is under control, some monetary expansion may well be the RBI’s festive offering to the economy.