The Rip Van Winkle Effect

ON February 28, when Finance Minister Palaniappan Chidambaram unveiled his sops-laden Bud -get, most observers felt that the economy had now received its much-needed booster. But almost six months after that exercise, the economy, instead of being in top gear, is at a standstill.

There is very little activity on any front. Industry hasn’t announced any new or expansion projects, infrastructure projects are on the backburner, the primary markets are at a six-year nadir, and banks are flush with funds as, despite lower interest rates, there are no takers.

 "A fear psychosis is prevailing, and everyone is playing it safe. No one is ready to take the risks as there is still an amount of uncertainty over the economy," says S. Raghuraman, secretary general of the Assocham. According to experts, the slump really began in August-September last year when high interest rates turned borrowers away. Investment plans were put on hold indefinitely.

To add to this, uncertainties and instability in the United Front government made small investors cautious of putting money in the stockmarkets. The first four months of 1997-98 has seen a stunning 95 per cent decline in amount mobilisation and a 90 per cent fall in the number of issues. July, which has seen only Rs 3 crore raised through share issues, is the worst-ever month the primary market has seen since June 1991 (which ended with Manmohan Singh’s first Budget), according to Prime Database.

To be fair, an alarmed government has done a lot on the policy front. The last few months have seen a series of announcements to improve economic sentiments. Interest rates have been brought down, terms made easy, procedural hurdles cut down and an extremely favourable credit policy really put things on a platter. But the economy remains stuck in the horse latitudes. "The government has done everything to buoy the economy in its Budget and afterwards in the credit policy, but the results of these are not forthcoming," says Subodh Bhargava, chief executive of the Eicher group.

Industry, on which the government’s hopes and estimates were pinned, is still under pressure from a dismal 1996-97 performance when growth came down from 12 per cent to a measly 6.7 per cent, and remains extremely cautious. "It’s a circle: bad results leading to tightening of leash on new investments which in turn resulted in cautious banks which have too much money but not enough takers," says former president of the Confederation of Indian Industry (CII), Shekhar Datta.

Some experts feel that at the root of all problems is the government’s efforts at quick fiscal management. They say that the government, under serious pressure from the IMF and the World Bank to pare down the fiscal deficit rapidly, has discouraged plan expenditure, that is, capital expenditure that will generate revenues. Social sector expenses and subsidies are seen as a political necessity, so the axe has fallen selectively on key infrastructure projects. This, in turn, has resulted in a lack of demand for a whole lot of other industrial products which depend on the core sector. Growth in the capital goods sector plunged from 19 per cent in 1995-96 to about seven per cent in 1996-97. The situation in the first quarter of 1997-98 is perhaps worse. The demand for cement and steel has fallen beyond all expectations and all public sector steel plants have recorded losses in the first quarter of 1997-98.

 "The government’s preoccupation with a 4.5 per cent fiscal deficit is a major factor in keeping money from flowing into start-up projects," says Datta. Bhargava agrees. In spite of all that the government has done to improve the situation, the missing link remains infrastructure, which is seeing hardly any investments, he says. The government has practically withdrawn from core sector projects and the private sector has not stepped in yet. According to Bhargava, the state of infrastructure is impacting consumer sentiment more than production sentiment. "There is no slowdown in production. Market shelves wouldn’t be full otherwise."

RPG group advisor D.H. Pai Panandiker, though, feels that today’s lull may be a delayed fallout of the drop in agricultural production in 1995-96 which resulted in a steep rise in agricultural prices towards the end of last year. This may have diverted consumer spending from industrial products to food items. The consumer durables sector—which witnessed a grand 36 per cent growth in 1995-96—grew by a paltry four per cent in 1996-97 and this year, despite an array of freebies from various companies, there’s been almost no growth over last year’s dismal figures.

THE new attitude of the banks is, however, a different ballgame altogether. After announcing the new, relaxed credit policy, the Reserve Bank of India (RBI) had estimated that credit offtake would pick up tremendously, but commercial banks, wary of past experiences, are still waiting for ‘quality borrowers’ who would guarantee returns. Risk is no longer the name of the game as the risk-taking intentions of the banks hover at an all-time low. The reason: fear.

For bankers, the changing economic scenario has suddenly made their jobs far more complex: there are many new areas, and many new modes of financing, and assessment of credit proposals has become that much more complex. The government being the owner, the amount of audit and answerability of these banks are tremendous and have increased following scandals and controversies. The bank scams have only added a few more shades of scepticism in their assessment process. Banks would, therefore, rather not lend at all than face the slightest uncertainty about getting their money back.

"There is a mismatch in the availability of funds," says Raghuraman. "Banks today have money and want to do only guaranteed business. They want to lend to those who do not require funds but not to those who do." The 1996-97 results of the banks only strengthens this assessment. Bank deposits during this period grew heavily against low credit growth. Rough estimates show that in the first quarter of 1997-98, bank deposits grew by about Rs 13,500 crore while credit declined by over Rs 1,500 crore.

According to Panandiker, with industrial growth coming down, the demand for credit had already gone down, and as a result of increased inflows from foreign institutional investors ( FIIs), NRIs, GDRs and other sources, the amount of money at the economy’s disposal has increased tremendously. In April-May this year, foreign direct investment, FII portfolio investment, and share issues by Indian companies in Europe and America have added up to $1. 3 billion, $200 million higher than the corresponding period last year. The government wants to put this money in circulation but the banks are wary.

However, if the scenario looks bleak currently, almost everyone is confident that it will not remain so for very long. India will tide over the present crisis in due course of time, feels industry. The general feeling is that this phase of non-performance will pass by the year-end and the Indian economy will see some vibrancy returning. Panandiker feels that the crisis is already bottoming out and the July quarter will chart the path of revival as the agricultural crop has been good and the industry has shown improved performance in July. By September, he feels, the first signs of the recovery should become visible.

But who will defy the current crisis of confidence and take the first step forward?