The Index
Emcee
The economyThe recently announced RBI measures aimed at propping up the rupee may or may not achieve their objective. The point, however, is that in the bargain economic growth is likely to be seriously jeopardised. Recent newspaper reports as well as subsequent commentaries have pointed out that the Indian economy has managed to pull back from the brink of recession. The optimism was pegged on the increasing industrial growth rate, which has shown a rise of 9 per cent in September and 6.4 per cent in October. Among the key industries that spearheaded the growth are cotton and blended textiles, jute products, man-made fibres and fertilisers. Recent figures revealed by the respective associations suggest that cement and sugar industry too have joined the group. But growth in a select group of industries can hardly be termed as recovery. Growth in the man-made fibres and cement industries has primarily been fuelled by increased capacity addition. Exports too have helped growth of man-made fibre,
cotton and blended textiles. However, depreciation of currencies in the South-east Asian economies has started having an impact on the star performer of our economy. Lower prices from these countries has not only started affecting Indian textile exports, but even the domestic market is being hit. Recent reports say that any further decrease in prices will result in a cut in production. Inspite of a satisfactory growth in exports in the earlier part of the year, performance for the year 1997-98 is expected to remain stagnant at Rs 3,200 crore. A slowdown at this stage in the textile industry is bound to have a serious adverse impact on the economy. Sudden growth in the cement industry is the only positive sign of revival, but most of the demand has been from the retail segment as can be judged from the stagnant growth rate by the steel industry and depressed prices. Bulk orders would have normally had an effect on prices. In other words, cement is not being used for setting up infrastructure projects. This
can be substantiated with the negative growth in the steel industry. Higher growth rate in the sugar industry is justified as the crushing season has just started, but more importantly the sugarcane crop this year has been poor, hence sugar mills are pushing themselves to achieve higher yields. Furthermore, higher production has been motivated by the central government extension of the period for selling free sale sugar quota. Increased sale of fertiliser has not only been due to increased area under cultivation, but also because of increased use of fertiliser as yields were getting affected due to wide fluctuations in rainfall and increased pestilence. Pest and crop diseases have started to surface due to high humidity and inadequate sunshine, which would continue the use of more fertilisers. However, increased use of fertiliser does not mean that the economy will benefit as the crop production is expected to be lower than last year, inspite of higher consumption of fertilisers. In other words most of the
growth recorded is of temporary nature and is not likely to sustain. Growth has been in pockets and not widespread. The fact that the economy has not revived can be ascertained from the fact that key sector industries are still in a mess. Growth in electricity generation has been low due to lack of industry demand. According to Union ministry of Power, growth would decelerate further in the coming months due to fall in demand from the agriculture and industrial sector - Proof 1. Steel, aluminium and copper industry which should normally be the first sectors to show signs of growth in case of a revival are all in doldrums. Though production of steel has increased it has resulted only in inventory build up. Aluminium and copper have both recorded negative growth in production - Proof 2. The capital goods industry is gasping for air and desperately asking for series to measures to revive itself. Electrical machinery industry, which has been one of the key performers in the previous year, and one in which
future power generations and utilisation depends has nothing to write home about this year - Proof 3. It is said that the performance of General Motors is a reflection of the American economy, the same is true back home. At present the automobile sector is swamped in darkness and so is the economy. All the related upstream and downstream industries are affected. A revival in the economy will need to take this sector in its stride, but consecutive negative growth rates hardly prove the point - Proof 4. Finally, despite increased liquidity, the growth in non-food credit has been marginal at best. The current year has recorded a minor 7 per cent growth by the first week of December 1997 over the previous period. The increase in disbursements by FIs could well be because of the lack of access to foreign funds - Proof 5. One of the main reasons identified for the slowdown and the subsequent recession was lack of infrastructural facilities. Hardly anything has happened in this sector, yet claims are being made
that the economy has revived. In May 1997, liquidity crunch and credit bottlenecks were identified as the main cause of slowdown. Subsequent to the credit policy, liquidity improved but then there were no sound borrowers in the market even at lower rates of interest. In December, however, the whole equation changed. The prolonged liquidity squeeze virtually dried out the buyers and the slowdown was attributed to lower demand. The situation prevailing at present is worse than that which prevailed in the earlier part of the year. The latest RBI measures to safeguard the rupee, which will push up interest rates across the board will only exacerbate the situation.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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