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Outlook still very bleak for Indian industry

A slowing global economy and sluggish domestic demand offer Indian industry little hope of improvement in 2001-02 from what was a disappointing year.

Depressed consumer sentiment, a need for infrastructure spending, expected slower exports, increased import competition, political uncertainty and drought have all taken their toll on business, and government steps to ease the burden are expected to take some time to filter through the economy.

Economists forecast a second straight year of slowing growth for industry. Estimates for the 2001-02 (April-March) fiscal year average 3.5-4.5 per cent, down from 4.9 per cent last year and 6.7 per cent in 1999-2000.

"Industry is caught in a very difficult recessionary situation and the factors that have contributed to this do not seem to be disappearing in the near future," said T K Bhowmick, economist with the Delhi-based Confederation of Indian Industry.

Worst affected will be the manufacturing sector, which contributes 80 per cent of industrial output but is now reeling from a vicious combination of excess capacities, low capital investment, and the uncertainties of demand, analysts said.

Consumer sentiment is depressed and not without reason. Successive years of poor farm output in India's billion-strong agriculture-driven economy, lower incomes and job insecurity as a result of the global services sector slowdown and volatile share markets have taken their toll.

Adding to its woes, the manufacturing sector is dealing not just with consumers shy of spending and poor infrastructure, but also an onslaught of cheaper foreign goods after India opened the doors to imports in most sectors in April.

PRAY FOR RAINS

In the past year, data shows the power and telecommunications sectors slowed, automobile sales dropped and both the railways and ports handled less traffic and cargo.

Exports were buoyant with 20 per cent growth last year, but they could slacken as the slump in global demand hits with a lag.

Bucking the trend are sectors like construction and mining, which in recent months have shown sharply higher growth, and this could in turn set off some demand for consumer goods.

This year's monsoon season remains the wild card. Analysts are hopeful that India will not face a third straight patchy monsoon for the first time in nearly three decades.

But parts of the western state of Rajasthan and earthquake-ravaged Gujarat are already reporting drought-like conditions.

Analysts say if the government is serious about getting industry back on the growth track, it should spend on core areas, such as infrastructure, and encourage demand across the economy.

But faced with an ambitious deficit target of 4.7 per cent of GDP, and a history of overshooting the target, the government has been cutting down on its spending on such vital areas.

In the past four years, government spending on the capital account has held steady, but total expenditure rose 45 per cent.

DELAYED IMPACT

Despite that, stimulating growth seems to be a top priority for both the central bank and government.

GDP, of which industry accounts for a quarter, slowed to 6.0 per cent growth in 2000/01 and is seen at 6.5 per cent this year.

The Reserve Bank of India has been easing policy, cutting the benchmark bank interest rate twice by a total of a percentage point since February and also eased banks' cash reserve ratio.

Finance Minister Yashwant Sinha's federal Budget cut taxes for individuals and firms and lowered import duties. Last week, Sinha raised foreign investment limits for several sectors.

PK Basu, chief economist for Southeast Asia at Credit Suisse First Boston, Singapore said these attempts will have a positive impact on demand and put industry on the recovery path. He forecast industrial growth at 8.0 per cent this year.

But Basu is one of the more optimistic on the sector's prospects and most economists were not convinced.

"The impact of the Budget measures may be felt only in the second half of the financial year, and there's political uncertainty to contend with," said CII's Bhowmick.

Lower interest rates will help firms raise cheap funds, but there did not seem to be any need to expand, he said.

The government also spent most of April fighting accusations of bribery in defence deals, which has distracted it.

Over the weekend there was more bad news for the ruling coalition as its allies lost in two of the five provincial elections, putting a question mark over the government's room to press ahead with its drive for economic reform.

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