The Amber Light Is On

THE irony is obvious. While economic dynamism lies at the very core of all the sound and fury of the 11th Lok Sabha elections, events in the countdown period have put the brakes on all future plans in a wide range of industries. And the fact that April-May is considered a lean season for economic activity has added to the litany of woes.

Says G.C. Garg, managing director of Lloyds Finance: "The monetary policy of the country has been overwhelmingly influenced by elections." Thus, one of the first casualties was liquidity which, in turn, has had a haemorrhaging effect on a number of businesses. The Rao Administration decided early on that it would go to the people with a low inflation rate. Says the CEO of a finance company: "I know for a fact that the Finance Ministry had given strict instructions to the Reserve Bank of India (RBI) to control inflation by whatever means. And the RBI assiduously followed by cutting down the money supply. I shudder to think of the consequences." 

The other major casualty has been public issues. "A lot of blood will flow in the months to come, especially in financial companies," says Sunil Gautam, director of Clea, a financial advertising agency which has naturally been hit hard. "For every issue coming to the market now, there are four dropping out." Alok Textiles first pruned its issue size, then postponed it and finally dropped the idea. Fancy Synthetics, another small company, also decided to pull out its public issue at the last moment.

Indeed, in the past couple of months, there has hardly been even one investment-worthy public issue. Those that are opening during these times are basically unheard of companies trying to mop up whatever money they can. According to Kensource Information Services, which studies the primary market, "though the number of issues between January and March this year was marginally higher, the total amount raised during the period fell by over 75 per cent, from Rs 8,869 crore for the first three months in 1995 to Rs 2,251 crore in 1996. In fact, total funding for primary market-assisted projects in the manufacturing sector has crashed from Rs 38,483 crore in 1994-95 to a mere Rs 14,070 in 1995-96."

 The large issues are all lined up to open after the elections. Gujarat State Fertilisers Corporation has planned a Rs 130-crore rights issue to open in June. Public sector corporations Bharat Petroleum and MTNL have lined up large issues after the polls. Bank of India plans to divest 15 per cent of its capital in the market after May. Industrial Finance Corporation of India is planning to tap the capital market with two bond issues aggregating Rs 2,000 crore, the first slated for June and the second for next January.

But even more than new issues, asset management companies have decided to wait for the outcome of elections. The political uncertainty, current and predicted, marking the whole poll period have deferred the launch of several mutual fund schemes, both Indian and foreign. ICICI Mutual, Templeton Asset Management Company, Escorts AMC, Bank of Baroda AMC, and the Lalbhai group have all postponed their launches. Says Somnath Roy, managing director of ICICI Asset Management: "We've postponed our launch owing to the elections. Investor confidence in mutual fund schemes has reached rock bottom, and political uncertainties are driving out even that little interest."

 ICICI Mutual had plans to launch the country's first debt market-oriented open end mutual fund in May. The Lalbhai group (of Arvind Mills fame), which has tied up with the US-based Wellington group for a mutual fund launch, has also kept its plan in abeyance. S.V. Joshi, managing director of Bank of Baroda AMC, says that only after judging the post-election political scenario will any decision be taken on the timing and product of their fund. US-based Goldman Sachs and Kotak Mahindra are planning a joint US $60 million private equity fund to be registered in Mauritius, again after three months.

Govind Bhandari, director of Securex Financial Services, sums up the mood. "Any decision that requires infusion of funds from external sources has been postponed till elections. As it is, the first quarter of a fiscal year is considered to be a lean period for business. Now thanks to elections, people have mentally switched off from taking any business decisions," he says. The manufacturing sector too is putting off implementation of plans. Hyderabad-based Sanghi Polyesters has decided to expand its polyester filament yarn capacity from 55,000 tonnes per annum (TPA) to 85,000 TPA at a cost of Rs 230 crore, but it is still in the planning stages. Hindustan Organic Chemicals has chalked up expansion and diversification plans worth Rs 2,400 crore over the next five years to reach world economic standards. But everything is on hold till after the polls.

Most infrastructure and project management companies are waiting for the polls to get over to seek ways to bring about an upswing in their businesses. The approval for Indian Oil Corporation's Mathura Refinery's hydrocarbon cracking unit has been delayed by the Cabinet Committee on Economic Affairs (CCEA) till after the polls. This unit is supposed to protect the Taj Mahal from the toxic fumes emanating from the refinery that are affecting the monument. The Rs 1,041-crore cracking unit has already been delayed by nearly a year.

THAT industrial activity has slowed down is also evident in the fall in disbursements by financial institutions. The Industrial Development Bank of India (IDBI) has disbursed Rs 45 crore less than last year to the industry during 1995-96. Against a total disbursement of Rs 10,575 crore, the Rs 45-crore dip may appear tiny, but considered against the fact that it had sanctioned Rs 19,500 crore for disbursement, the decline assumes significance. Says Bhandari: "Obviously, the manufacturing sector has got access to the funds, but fear of elections combined with a low liquidity regime has postponed many of their plans."

 Even international real estate developers are adopting a wait-and-watch stand before entering the country. Knight Frank Routley of the UK, Bechtel, Heinz International, Portsman and First Capital Corporation of the US, and Hong Kong Land, a Jardine Matheson group company, are some of the real estate developers who have evinced keen interest in entering the Indian market. But despite the price slump, they are waiting for the elections to get over and the stringent RBI norms on property development to be relaxed.

The ban against sugar exports by the Union Government has also resulted in a blow to the domestic industry. The Centre has withheld the announcement of the new ex-factory prices for levy sugar and the factory-wise statutory minimum price (SMP) of sugarcane applicable for the 1995-96 season. Despite the CCEA's clearance for export of five lakh tonnes of sugar, the formal government clearance has been delayed on account of elections. With the decision on both the SMP and the export clearance being held back, industry experts are estimating cane arrears at over Rs 600 crore already. "This is because banks continue to evaluate levy sugar stocks at the lower 1994-95 prices, while analysts feel the new levy prices would go up by over Rs 100 per quintal," says a player.

But the worst hit has been the leasing industry. There has been only an interim budget this year. In the meantime, the Central Board of Direct Taxes (CBDT) has issued a circular that has confused the entire industry. The very definition of financial and operating lease may have to be redefined after the elections. As a result, no fresh leasing activity is being done till June, when the new budget will be placed before Parliament. Says Garg of Lloyds Finance: "The CBDT found out that leasing business was not being conducted on a healthy basis. The sale and lease back of assets has been controversial. In some cases, for assets worth Rs 100, depreciation to the tune of Rs 700 was being claimed. Several finance companies also spearheaded lease syndication of old assets of state electricity boards where no capital formation was taking place. Now, thanks to the elections, the clarification on these points may get delayed till the next budget."

 Industry anticipates that things will improve after the polls. But the liquidity crunch will possibly stay till September when the next credit policy is announced. "Thanks to the delay in the budget due to elections, the country has already lost four months of additional revenue. The relief after the elections will be at best psychological," says Garg. And with a hung parliament looming large, no one expects a radical upturn in the business environment.