When Will The Bazaar Gloom Lift?

ON Wednesday, August 12, the rupee sank to a record low of 43.35 against the dollar.The 30-share BSE Sensitive Index dropped to a year’s low of 2924.24. Mattersevidently went a little out of hand because the Reserve Bank of India felt it necessary tobreak a self-imposed silence of three months and intervene to pull the rupee back. Withthe Japanese yen weakening and the Chinese yuan teetering at the edge of devaluation,India’s financial markets seemed quite set on a rolldown last week. Add to this thedepressed economic sentiment inside the country and one quite understands the earnestefforts of the VHP to put the legend "In God we trust" on every currency note.

Despite the much-awaited turnaround proving a mirage time and again,finance minister Yashwant Sinha is a fiercely optimistic man. Said he in a recentinterview: "We don’t have to wait long. I think by September or October thepresent mood of gloom in a section of our trade and industry will be replaced byhope...Investor confidence will return. Both domestic and foreign investment will pick upand the present blues will soon be forgotten."

 Can we believe this man? After a slowdown that has lasted close tothree years contrary to all expectations, are we about to turn the corner? Will economicsentiments, which have of late touched the rock-bottom of despondency, at last bounceback? Is the economy finally waking up from a long, lethargic inertia?

Few are willing to bet on it. Says a cagey Amit Mitra, FICCI secretary-general:"It’s risky to make any prediction now. The downtrend has lasted longer than weexpected. We still hope that revival is round the corner, at least by the end of thefiscal year." Adds economist and director with Rajiv Gandhi Foundation Bibek Debroy:"I don’t see any signs of the gloom lifting in the coming months. All thegovernment has done so far is to make a lot of noise about its intents. But you need somedefinitive action." Explains Shubhashis Gangopadhyay, professor, Indian StatisticalInstitute: "Information available with us doesn’t indicate the gloom lifting inthe immediate future. Perhaps the government is hopeful on the basis of the latesteconomic data." But there are optimists too. Says economist Surjit S. Bhalla: "Itend to agree with Mr Sinha, though not for the same reasons. I’m quite bullish aboutthe future because I think the worst is definitely over."

The sceptics could have a point because Sinha’s buoyancy is notbacked by facts—the latest indicators of economic performance. Inflation is ruling at8.32 per cent (at July-end), foodgrain output stands revised downwards at 194 milliontonnes, industrial growth was down to 5.2 per cent in June, exports dipped by 11 per centin the same month and imports by about 4 per cent. Independent research institutes,industry associations, global credit organisations—all those in the business ofpredictions and policy advice—have unhesitatingly marked out the problem areas andthe likely scenario at the end of the year provided the economic conditions remain thesame. And that’s far from encouraging.

The National Council for Applied Economic Research (NCAER) has ruledout a recovery in the second quarter, while the Centre for Monitoring Indian Economy(CMIE) says sanctions and political instability have worsened the investment climate for1998-99. Both have predicted a decline in capital formation, especially in the publicsector, despite the budget raising plan investment.

In fact, there’s very little indication that industrial slowdown is abating.NCAER’s quarterly forecasts say high interest rates and probable rupee depreciationcould inhibit upswing in credit and imports, thus affecting manufacturing activity. TheCouncil’s latest Business Confidence Survey found the Confidence Index slipping toonly 68.3, recording the steepest decline so far. Perception of overall economicconditions, financial position, investment climate and capacity utilisation were allnegative contributors to the index, which showed a small improvement only in the westernregion.

A fact amply reflected in the first quarter corporate numbers for the current fiscal.In one of the worst records of performances (comparison, though, is not easy as this isthe first time companies have unveiled Q1 results), corporate India’s net profitswould have dropped about a fifth in April-June, 1998, but was saved by the sheer strengthof the numbers of Reliance Industries and the refineries. Says Mitra: "The lack ofdemand across the board has depressed production, which has affected bottomlines. But theslowdown is sector-specific, some areas like computer software and gems and jewellery aredoing very well." No wonder recession-hit industrialists are aggrieved. Says RahulBajaj, chairman of Bajaj Auto: "Nobody can say when the gloom will lift. The capitalmarket is beaten, the rupee is falling, demand is slack and spending on infrastructure isdown." Adds Subodh Bhargava, chairman, Eicher group: "Consumer resistance topurchasing is going down, and even businesses are looking kindlier at investments incapacity improvement and technology upgradation, but these factors are not enough and canonly have a limited impact in the absence of infrastructure investment."

If corporate India is waiting for some magic step by the government tosend sentiments soaring—be it infrastructure spending, or disinvestment, or sops forthe capital market—they could be forthcoming. Especially in disinvestment, which canwell be the government’s triple-edged sword. A well-planned privatisation spree canrevive the stockmarket and flare investor (read FIIs) interest, revamp India’sperception abroad, and bring in much-needed cash. Bhalla’s optimism, for instance,stems from the volley of post-budget measures which Manmohan Singh has called "theinterim budget".

Says Bhalla: "The response to the budget was overwhelminglynegative. But that has changed now. The government has made all the right noises on thedisinvestment front and announced several steps to boost infotech exports. Hopefully,insurance reforms will follow." Debroy, however, doesn’t expect the governmentto follow through on its promises on disinvestment but expects the Resurgent India Bondsto add to the revival of investor sentiment and foreign investor perception.

Bhalla also feels the past three months’ upheavals in the stockmarketare just the AFP second leg of the trough, which now shows definite signs of bottomingout. "The worst," he explains, "is over in the stockmarket, the worst isover on the nuclear madness—India will probably sign the CTBT—the Asian crisisis bottoming out, and I don’t expect China to devalue the yuan. So by the year end,if not earlier, the first phase of the recovery will have begun. "

Debroy, however, feels that steps for capital market and trade reforms areabsolutely necessary to lift the economy out of the depression. Notable among them aresome liberalisation in the capital account and slashing import tariffs and quantitativerestrictions. A boost to exports, he feels, is a must, due to the economic flux in theregion, and to hold the rupee. Adds Mitra: "If the yuan is not devalued, the USeconomy remains stable along with the dollar, the government is committed to increasedcapital spending, and if corporates get higher access to funds at competitive rates, theindustry should be back on the rails by 1998-99 end."

Interestingly, one area where experts agree is inflation. Theoverwhelming consensus seems to be inflation will soar but not go out of control. Thecurrent high phase of inflation is expected to run its course by the end of 1998, with thearrival of the new season and flush of crops. Historically, that’s also the time ofthe year when industrial/business cycles peak (May is the worst month). So, chances ofsome natural intervention to prove Sinha right are high.

Provided of course he’s there then. Thanks to Jayalalitha, politicalinstability seems to have crept right back as the worm in the economy apple. As Bajajcribs: "We need political stability and certainty and a comprehensive competitionpolicy. Instead of fighting among ourselves, we should compete with the 186 countries inthe UN." Gangopadhyay, who has conducted a study for the finance ministry on businesscycles and political stability, finds the current downtrend began with the UF in 1996 andcontinues as the present government is not strong enough to pursue reforms."Ironically," he says, "while the Congress seems to be the strongest partynow because of Jayalalitha’s efforts, if you look back, that’s the partyresponsible for the present mess."

But the chances of the BJP’s continuing in power three months laterdon’t detract from the economic bullishness, feels Bhalla. And as Debroy concludes ina lighter vein, "Historically, Sinha has always given the final push to reforms. In1991, there was the interim budget followed by the balance of payments crisis. This timethere could be more nuclear tests!" But for a change, the government has beenseriously trying to heed economist Jagdish Bhagwati’s advice and talk up the economy.If it succeeds, it might just invent a far easier path to get back to reforms.