Indian economy: Outlook is bright but fundamental problems persist

Prime Minister Rajiv Gandhi could not have wished for a better pre-election year. A bumper food crop is on the anvil. Despite periodic hiccups, the stock - market is going through the roof, prices appear, for the time being, under control, companies are not doing badly at all, and even industries which had fared indifferently over the last few years (for instance, fertiliser and cement) have perked up. And though the overall mood among businessmen and economists is not quite euphoric - it's cautiously optimistic - many believe the good times should last for at least a couple of months.The signs of a boom are visible. Key infrastructural areas such as power and freight movement are in robust health. With reservoirs abrim, the power position is comfortable. N. Vaghul, chairman of the state - owned Industrial Credit and Investment Corporation of India (ICICI), points out that commercial vehicle sales are climbing, signifying that more goods are being moved - an important index of the economy's well - being. Light commercial vehicle production in the first quarter of this year was up by 20 per cent compared with last year's first quarter. In the same time span, the railways have moved 3.7 per cent more freight.Other core areas are also flourishing. Between April and July this year, saleable steel production shot up by 14.5 per cent as against last year. So did coal output, though more modestly. Cement production in May and June rose by over 17 percent in relation to the figures for 1987, evidently indicating that excess production capacities are less of a headache now as housing picks up.The sunny news, however, is marred by clusters of dark clouds. The economy's deep - rooted problems persist: the domestic and foreign debt burden, inflation, the trade deficit, the precarious foreign exchange reserves position and sickness in industry, to name just a few. What also remains unclear is whether the current upswing will be as pronounced as in 1986 - 87, a year that saw industrial output grow by over 9 per cent. This will be known only by early next year.But there is no denying that the latest economic upturn is different from the upswing between 1984 and 1986, when for the first time in recent decades industrial production grew annually by more than 8 per cent for three consecutive years. This was not merely a consequence of good rainfall. The new government had then raised high hopes with its liberalisation policies; this is no longer a factor in the expectations game.This time the sense of hope in the Government and the business community is fuelled by one overriding factor: Indra, the rain God, has cast his benevolent gaze on the country after three long years. "I will be surprised if food grain production falls below 166 million tonnes in 1988 - 89; the figure may even touch 170 million tonnes, which will be substantially higher than the 1983 - 84 peak of 152.4 million tonnes," exults Nitin Desai, the Government's chief economic adviser.Higher agricultural production should help put the lid on prices. Argues C. Rangarajan, deputy governor of the Reserve Bank of India (RBI): "By this time last year, the wholesale price index was up by 8.3 per cent, but the increase this year has only been 5.4 per cent.My hunch is that, at worst, the rate of inflation in 1988 - 89 will be somewhere between 7 per cent and 8 per cent." Adds ICICI's Vaghul: "If we can't check inflation this year, then we can never do it."While several are less sanguine about the Government's efforts to keep the rate of inflation below last year's 10.6 percent increase in the wholesale price index, the industrial outlook seems reasonably good till the first quarter of next year. "Industrialists are, by and large, in an upbeat mood," notes Vaghul.He's right. Forecasts Raunaq Singh, vice - president of the Federation of Indian Chambers of Commerce and Industry (FICCI), which represents big business: "I think the industrial growth rate will be between 11 per cent and 12 per cent this year. The prospects are excellent." Summing up industry assessments, Tata Sons Director Freddie A. Mehta adds: "I expect the economy to pick up in the short run.The Government's policies of liberalisation should continue. I notice that even the opposition parties are not talking any more about nationalising private business."Share price indices have been quick to celebrate the mood in the industry. The Bombay Stock Exchange (BSE) index, for instance, gained an astonishing 285 points between March and October - end, when it topped 675. And that's for starters, if BSE President Govind Bhai Desai is to be believed. Says he: "The index is expected to cross 900 by next March and may even come close to the magic 1,000 mark."There's reason for such unfettered joy. According to Desai, the hangover of the 1987 drought persists, and the good monsoon's impact will be felt only next year. But industrial sectors directly linked to agriculture are already experiencing the fall - out of the good harvest.The fertiliser industry was saddled with worryingly large stocks for the last 18 months. These are fast disappearing. Though the Government predicts that fertiliser consumption this year will be 9.1 million tonnes, half a million more than last year's 8.6 million tonnes, the industry expects it to cross 10 million tonnes. This year, farmers are expected to buy one lakh tractors, 17,000 more than last year.Nitin Desaichief economic adviserFinance Ministry"Grain production may touch 170 million tonnes, which is higher than the 1983-84 peak." Other industrial sectors too are looking up. More consumer goods and consumer durables are expected to be sold in semi - urban and rural areas. Seven two - wheeler manufacturers have already reported in their latest balance sheets a combined sales increase of nearly 30 per cent.Even the once - troubled pharmaceutical industry seems to have crossed the hump. "Pharmaceutical sales are booming," says Ajay Piramal, who heads the Bombay - based Nicholas Laboratories. And in the paper industry, the raw materials position is better today than what it has been for the last four years. As a result, paper mills are putting their production capacities to better use than they have for a long time.In some cases, export prospects are bolstering the collective optimism. The ICICI chairman says that the outlook for exports in the engineering and chemicals industries is better than ever before.The odd ones out are, of course, the jute and textile industries; both are in sick bay. "The recent performance of textile mills in the organised sector is pretty dismal," says R.L.N. Vijaya Nagar, secretary - general of the Mill owners' Federation, Bombay. "Despite the prosperous agricultural season, textile sales have not gone up as expected. Till end - October, the bumper cotton crop had not exercised a benign influence on prices." In 1986 - 87, 15 of the 18 mills that are federation members had earned profits before depreciation. Last year, however, the number plummeted to 12. And this year may be no different.Raunaq Singhvice-presidentFICCI"The industrial growth rate will be between 11 and 12 per cent. The prospects are excellent."Meanwhile, several industrialists are apprehensive about other issues. "The biggest problem for manufacturing industry is raw material supplies, which in turn are partially related to imports," contends Vinod Doshi, chairman of Premier Automobiles."The foreign exchange situation is worrying and if the Government panics and starts opening and shutting doors to imports, things can go haywire."There's cause for concern here. The trade deficit shows few signs of narrowing and the country's foreign exchange position is grave because, among other things, India's loan repayments to the International Monetary Fund peak this year. Next year too, repayment obligations are high. Obviously, the position will remain almost as precarious.To put this into perspective, for most of last year the country had just enough hard currency to sustain imports for three months. While the RBI's Rangarajan feels that this level of reserves is "adequate", others disagree. "The kinds of concessions given to non - resident Indians for purchasing the bonds recently floated by the State Bank of India is a clear indication of the signs of desperation on the foreign exchange front," says an independent Bombay - based financial consultant.Some businessmen are also worried by the steady depreciation of the rupee vis - a - vis other currencies. An internal study by a foreign bank predicts that one pound sterling may be equivalent to Rs 50 in five years' time. Rangarajan says that this should not cause undue consternation since the "real effective exchange rate" of the rupee (after taking into account inflation levels in different countries) is much higher than what the "nominal" rates of exchange seem to suggest.Even so, the rupee's depreciation could raise the price of imported wares and ultimately tell on domestic prices. That this hasn't happened so far is because international oil and edible oil prices have remained low. But the position could change. World petrochemical prices have shot up, as have metal prices. Economists like Prabhat Patnaik at New Delhi's Jawaharlal Nehru University, therefore, argue that the rupee's depreciation will have an inflationary effect on the economy in the long run.Govind Bhai DesaipresidentBombay Stock Exchange"The BSE share price index (at 699 points last fortnight) could cross 900 by next March." Inflation is indeed the major worry. Says industrialist Harish Mahindra: "I won't be surprised if we again have a bout of double - digit inflation." Prices usually drop every year between October and January, but the decline wasn't significant last month. "The seasonal price decline in October has not been pronounced.This seems to indicate that the price situation is still very difficult." warns Patnaik. Moreover, the wholesale price index climbed by 7.5 per cent between April and early October this year. Government economists reserve comment, preferring to wait till January.The problem of prices is a tricky one, if the Government keeps prices under check, it will gain mass votes. But a certain rate of inflation is also necessary to keep the stock - markets buoyant, particularly since much of the industrial growth in India has been traditionally fuelled by inflation. "In the Indian context, prices are unfortunately not determined by market forces of demand and supply, but by marches andmorchas," says Freddie Mehta.Harish Mahindraindustrialist"I won't be surprised at all if we again have about of double digit inflation."D.T. Lakdawala, former deputy chairman of the Planning Commission, believes that only if next year's agricultural season is good will the economy really revive. "Two good years, not one, make all the difference," he cautions. The septuagenarian Calcutta - based economist Bhabatosh Datta adds a sobering thought: "To merely talk of a record food output is misleading because we are calculating the increase from a low base - the fact is that if we actually touch the 165 - million - tonne food production mark, we will only be climbing back to the target which was set for the seventh plan."If food output is up, stocks are down, from a high of 23 million tonnes by the end of June 1987 to roughly 12 million tonnes now. Bank credit for food grain procurement has slumped dramatically, while nonfood credit has gone up. This situation is likely to be reversed as the Government attempts to beef up the food buffer, thus squeezing the flow of funds to industry and trade to that extent.There are unquestionably, several other grey areas. There are pointers to an alarming budget deficit this year. When the then finance minister N.D. Tiwari presented his budget last February, the Government's net borrowing from the Reserve Bank (one index of the degree of deficit financing) was pegged at Rs 7,484 crore. Before the middle of the financial year, the figure had topped Rs 5,000 crore.What's more, the Government is neither curtailing subsidies nor going on a slimming exercise. Finally, the long - term problems look daunting. As Datta notes: "The highly - skewed pattern of income distribution, the sharp regional imbalances, unemployment, industrial sickness, the relation between the public and private sectors - these are all crucial issues which cannot be resolved in a year or two or even in five years."Obviously, today's optimism is tempered with caution. A bad monsoon next year could take the country back to square one. There is also the feeling that electoral compulsions could compel the Government to chart a populist course, throwing the country's finances even more out of gear.At the moment, however, the signals are green and the economy is in good shape. The rest is up to the prime minister - and the imperatives of the coming elections.Published By: AtMigration Published On: Nov 30, 1988 00:00 IST--- ENDS ---

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Indian economy: Outlook is bright but fundamental problems persist

Outlook is bright but fundamental problems persist.

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