Time to raise public investment

By Prem Shankar Jha

The bad news just keeps coming. The most recent is a drop in the net profit earned by IDBI across its entire portfolio of investments. This has sunk by a whopping 65 per cent from Rs. 947 crores in 1999-2000 to Rs. 331 crores in 2000-01. Mirroring this, the price earnings ratio on the shares of a sample of 302 companies has fallen to a six year low of 9.72. This is barely half of what is considered normal in a healthy economy with a well regulated stock market. The heady days, seven years ago, when it had hit a peak of 55 to 1 are now a distant memory.

The only silver lining was a prediction by the National Council of Applied Economic Research that the gross domestic product was likely to grow by 6.3 to 6.8 per cent in 2001-02, but on closer examination this too turns out to be little more than wishful thinking. The NCAER made its prediction conditional on the achievement of a 7 per cent growth in industrial value added, and a 3.5 per cent growth in agriculture. The first would require a truly dramatic recovery, but there is not even a flicker of one on the horizon so far.

In the first three months of this calendar year, industrial growth fell to an abysmal 2.1 per cent. Were it to rise smoothly for the next 12 months, to achieve a 7 per cent average growth of the entire year, the monthly growth rate would have to climb steadily from around 3 per cent in April to 11 per cent in March 2002.

Had a recovery indeed been in the offing, commercial bank advances to the non-food sector and non-oil imports would already have begun to rise (both these invariably precede increases of industrial growth by about three months). Instead, the growth of non-food credit fell sharply from 21.9 per cent at the end of March 2000 to 13 per cent in March this year.

Within the year, bank credit grew by 22 to 24 per cent from June to September. This led to a rise of the industrial growth rate to 5.9, 6,8 and 7.4 per cent in September, October and November. After September, the rate of growth of non-food credit has fallen continuously to 13 per cent in March. Clearly no one has plans to produce more in the next three months.

As for non-oil imports, far from rising, these had fallen by over 6 per cent by the end of January. Deducting food products from the list only brought down the decline to 5 per cent. By contrast in 1994-96 when industrial growth rose from 7 to 16 per cent, non-oil imports rose by 30 per cent per annum !

The most that the country can expect is a fractional rise in industrial growth from 4.1 per cent to a shade over 5 per cent. But since the growth rate was a paltry 1.3 per cent in March, even that will require a substantial recovery to 7 to 8 per cent by next March. It is a sobering thought that such a ``high'' growth rate has only been achieved in a single month since the middle of 1999.

As for agriculture, since there was a 4.6 per cent decline last year a 'rebound' of 3.5 per cent is entirely feasible in the absence of a drought. But even that will yield an average growth in the primary and secondary sectors of no more than 4.2 to 4.3 per cent. Even if the services sector grows, as predicted by the NCAER, at 7.9 per cent, the overall rate of growth of GDP will not exceed 6 per cent.

The NCAER's estimate is, therefore, not merely wishful thinking. It might be an attempt to tell the Government and its economic advisers so desperately wants to hear - that all is hunky dory with the economy, and they need to do nothing to it. The truth is that India is in the deepest of possible slumps. There is a complete stagnation of demand, and an absolute decline in that for consumer durables. This is reflected in an almost unnatural stability of prices, masked only by the headlong rise in power, crude oil and petroleum product prices.

After hitting a peak of 8.6 per cent in the first week of February, the inflation rate, measured by the wholesale price index, fell to 4.94 per cent in the second week of April. This fall reflected the fact that the economy had absorbed the impact of the fuel price hikes the Government had announced in October last year. But the year-on-year comparison is once again deceptive because it reflects a fall in prices in 1999-2000 (the denominator) more than a rise in 2000-01 (the numerator). If one excludes fuel prices, the core rate of inflation has remained virtually static. The WPI was 157.8 in October 2000. Despite the petroleum products price hike, it had risen to only 160 in the second week of May.

Only when one concedes that the Indian economy is in a slump do the IDBI results for 2000-01, and the low P/E ratio on shares, start making sense. Neither of these can be ascribed either to the global economic slowdown or the collapse of the technology stock bubble in America last year - explanations that are regularly favoured by India's tiny but vocal band of neo-liberal economists. Its profits have dipped sharply because for four years industry has been trying to cope with slackening demand by cutting profit margins. This has inexorably ground profits down.

Industrialists received a reprieve in 1999 when the payment of salary arrears to civil servants and a bumper wheat harvest pushed up demand for consumer goods briefly. But as the Economic Survey pointed out this year, this boost to demand exhausted itself in 2000-01. That is why the remorseless pressure on profits has begun once again.

The time has come for increasing public investment, especially in the more than 600 incomplete medium and major infrastructure projects (mainly irrigation and power) that litter the countryside. This will not only revive investment but also yield a return to the people from the thousands of crores of their money that State and Central governments have so irresponsibly appropriated.

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Section  : Business
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