Outlook in December about a 9.5 per cent industrial growth. In February, buoyed by "robust agricultural performance in the second half" and "corrective measures being taken by the government against demand slowdown", CII had expected industry to grow at 10 per cent, just a shade off last year's figure of 11.6. Then, in April, came the NCAER forecast of 9.20 per cent. Two months on, at 6.7 per cent, the actual figure released by the Central Statistical Organisation (CSO) has missed all of them by a mile.
Says Finance Minister P. Chidambaram: "The policies between '94-96 led to a cash crunch. Foodgrain production was down by three per cent and the liquidity crisis was too palpable.... Banks are still afraid to lend..". Foodgrain production, stagnating in the recent past around 3.5 per cent, slumped in 1995-96 by 3.4 per cent. Although it bounced back last year to 3.7 per cent, the lack of agricultural demand in the previous year had a lag effect on manufacturing growth.
More important for industry, however, is the dismal lack of infrastructure, especially power. Agrees Shashank Bhide, head of research at NCAER: "Industrial growth has been contained by lower investment, which was choked off by high real interest rates, and infrastructure bottlenecks." Electricity and mining, which together have a weight of 23 per cent in the Index of Industrial Production (IIP), performed miserably in the first six months of the year, showing a dismal average growth of 2.82 per cent and 1.02 per cent, respectively. Together with poor imports, the lag effect was clearly visible in the manufacturing sector.
Said Amit Mitra, secretary general of FICCI, the old-fashioned chamber which was pessimistic about industrial growth from the beginning: "If industrial growth is down, it's because of the manufacturing sector, which is its main component." In fact, manufacturing growth was a creditable 12 per cent plus in the first half, but crashed to 4.5 per cent in the second. The resultant impact—mining and electricity fared consistently badly throughout the year—pulled industrial growth down from 9.61 per cent in the first half to a poor 4.19 in the second. Manufacturing has a weight of over 77 per cent in the index.
Industry ministry officials admit to a general setback to the economy's investment climate, a depressed sentiment that business is currently finding it hard to get out of. Get down to the breakup of the manufacturing sector growth, and it hits squarely between the eyes. IIP's use-based classification reveals an all-round slump—from 36 per cent in 1995-96 to 4.3 per cent in consumer durables—traditionally the best indicator of consumer mood—from 7.2 per cent to 3.8 per cent in consumer non-durables, and from 17.7 per cent to 8.5 per cent for capital goods. The decline is less severe in intermediate goods, from 10. 7 per cent to 7.1 per cent.
There's more proof that the decline has been mainly brought about by a downturn in investment levels. Take capital goods. Not only did their import decline, but their production growth too slumped from 18.5 per cent in the first half to a negative 0.82 per cent in the second. While slow consumer offtake did consumer durables in—9.8 per cent in the first half was replaced by an abysmal minus 0.28 per cent in the second—throughout the year, business confidence surveys consistently pointed southwards.
Agrees Mitra: "The operating surplus of the companies was dangerously low. Leave alone a cushion, there was not even a security. While inventories piled up in both the public and private sectors, there was very little movement in demand." In fact, Mitra also blames the government for adding to the slowdown. According to him, government expenditure in public works declined significantly and as a result, there was little offtake in allied products and services. The lack of demand in the core sector affected demand in all other industrial sectors.
The government, it seems, has yet to reconcile to the reality of non-existent private investment in infrastructure. Without substantial public investments in power, communications and basic infrastructure like roads and transport, thanks to the necessity of pegging the fiscal deficit really low, private investment does not seem to be getting that final push. There was a dearth of new projects, the capital market remained downbeat, yet the banks were flush with funds. And the slow-moving credit policy of 1996-97 and bank scepticism towards new lending didn't improve things much.
The question now is: will last year's overhang cloud the prospects for the current year too? NCAER expects industrial growth to stay pretty much at last year's level, under 10 per cent. A CII business outlook survey finds less than half of the respondents optimistic about the investment and sales climate, though they expect industrial growth to cross the double-digit mark. And the government, of course, is upbeat. Says Chidambaram, without hazarding a forecast for the year: "The fundamentals point to an economy in good shape. The GDP will be better than most of the projections."
Industry, however, is waiting for the government to show the way. Especially during the forthcoming busy season September-February, when crucial demand—both in agriculture and industry—is expected to pick up the most. A record foodgrain production of close to 199 mt and the recent bank rate cut has buoyed hopes all round. Says Mitra: "What we require is a kickstart in the core sector which will impact the other sectors." NCAER, however, expects foreign investment to pick up substantially this year, as also a 15 per cent rise in public investment. This would be accompanied by a moderate inflation of nine per cent, reflecting the rise in demand.
Concerns, however, remain in the form of burgeoning forex reserves—$28 billion at last count—which may harden the rupee if not used soon for a liberal dose of imports. Banks need a prod in the ribs to lend, which is curiously still absent. The political uncertainty, especially reflected in the indecision over an oil price hike, still hangs heavy on the economic horizon. Despite Chidambaram's fond hopes, there is very little sign of economic necessities taking precedence over unnecessary political turmoil.
