October 6: Leading economic indicators show signs of the industrial recession coming to an end, according to the National Council of Applied Economic Research (NCAER).

Also, the macro-economic scenario shows an overall real gross domestic product (GDP) growth of 6.6 per cent for 1997-98.

An investor-friendly budget and lower interest rates have improved the investment climate, said the NCAER in its quarterly update Macro Track.

The move towards greater convertibility on capital account would increase access of firms to global finance and reduce the pressure on cost of funds, raising investments.

Higher agricultural input as well as implementation of the central Pay Commission recommendations and lower marginal tax are likely to improve consumer demand, it said.

As consumption and investment rise, imports should pick up. That would raise the demand for dollars, making it easier for the Reserve Bank to prevent the value of rupee from appreciating in face of higher inflows of foreign capital.

This would improve the prospects for exports, the NCAER said. ``On the positive side thus, we expect to see an increase in demand in investment, consumption and exports.''

However, a cause of concern is the size of fiscal deficit and its likely impact on prices and interest rates. Absorbing part of the oil pool deficit, lower tax collections due to relatively depressed growth in industry and imports, lower tax rates and higher pay to government employees would lead to a higher fiscal deficit, the NCAER predicted.

Nevertheless, the overall demand in 1997-98 is expected to be higher, pulling industry out of a recession essentially caused by depressed demand and high cost of capital, the think-tank council said.

As inventories go down, production should pick up. But the growth of manufacturing output is likely to be lower than the high of 1995-96.

The NCAER said many of the variables that have been found to lead growth in production such as trade, credit and business confidence which had been showing a cyclical downturn for most of last year no longer indicate a further slide.

For industrial output, there are no robust indicators but the latest data suggests that the slowdown in its growth will soon trough, it said.

This downward revision follows the new official estimates of agricultural output for the last year which raised foodgrain output to a record 19.8 crore tonne, slower rise in imports even up to May, 1997 and lack of immediate signs of increased investment activity a key to the growth in manufacturing activity.

This results from a growth in the output of 3.6 per cent in agriculture, 8.2 per cent in manufacturing, 8.3 per cent in construction, 8.8 per cent in infrastructure consisting of transportation, power and mining besides services growth of 8.4 per cent, the NCAER said.

These growth rates coming on top of the estimates for 1996-97 released by the central statistical organisation suggest a strong growth for the economy. The projected growth involves a recovery of growth in private investment and export performance, it said. Recovery in investment is based on the drop in interest rates, which have already taken place, assumed flow of tax savings into investment and the better than expected rabi harvest early in April to May this year.

In conclusion, the NCAER said that projected macro outlook for 1997-98 continues to be one suggesting strong growth but less than anticipations formed soon after the central budget for the current year. At present, the projected key macro ratios indicate three trends. One, an improvement in investment rate due to higher growth in private investment demand which in turn reflects improved investment climate. Two, a stable fiscal deficit which indicates slower rise in revenues and higher expenditures than budgeted. And lastly, an increased current account deficit but within the safe limit of two per cent of the GDP.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.