NEW DELHI, July 7: Following the announcement in Finance Minister P Chidambaram's budget speech, it was a foregone conclusion that the nine top public sector units (PSUs) or navratnas would be given complete autonomy.

Yet, what is important in the Cabinet decision is not so much the decision, as the timing. First, it comes at a time when most had begun to despair that political uncertainty would prevent any serious reforms from taking place.

Second, and more important, it comes on top of several other decisions/events in recent weeks - all of which have served to bolster the investors sagging confidence.

Not surprisingly, both the CII as well as the NCAER indices of business confidence seem to reflect this new-found optimism that happily enough can also be seen in the Sensex. While the Sensex touched the 52-week high a few days ago, CII's survey showed that 45 per cent of units polled were confident that things will look up - just 26 per cent of businessmen felt this way six months ago.

The decision to free the navratnas comes along with the decision to further delicense 5 other industries, leaving just 9 industries which still require licenses. A few weeks prior to this, the RBI cut the bank rate, and thus ensured that the prime lending rate of banks has gone down by 2 per cent over the year.

Apart from other changes like those in the Companies Law and replacing FERA with FEMA (all of this is supposed to take place in the next session of Parliament), what is of immediate relevance is whether demand for goods is going to pick up soon. A large part of the poor corporate results we're reading so much these days, is due to the near-stagnant demand conditions of the last year - of course, the high rates of interest and the minimum alternate tax were also important reasons.

All present indicators seem to point to the fact that last year's demand recession is a thing of the past. The continued boom in agriculture will be a big factor in boosting demand - agriculture is expected to grow by 2.5 per cent this year, on top of the 3.5 per cent last year. Higher prices for farm goods, which will happen since the sector is slowly being deregulated, will also boost demand. Lower taxes, according to the investment banker HSBC Batlivala & Karani will imply an increase of Rs 4,700 crore in terms of disposable income. Implementation of the Pay Commission report will add another Rs 4,800 crore to purchasing power of consumers.

Given the usual kind of multiplier effect this has, according to HSBC analysts, the economy (or GDP) will grow by an additional 1.2 per cent over the next few years. As such, it seems like it's goodbye to demand problems this year.

It would, of course, be foolish to even begin to believe that the economy's problems are anywhere close to getting over. For every good decision taken, there are two critical decisions which have not been taken. The most obvious of these is that relating to subsidies, especially those on petroleum products. It remains equally true that despite the freedom to the navratnas, precious little has been done to free the other PSUs from the government's shackles. Indeed, no decision has been taken on the recommendations of the Disinvestment Commission on 15 PSUs including ITDC.The government continues to pussyfoot on the issue of cloing down sick PSUs like IDPL, HEC and NTPC. Instead, public money continues to be wasted on subsidising these loss-making units. And unless the combined deficit of the public sector (including the government) is cut, it is clear that the economy will always remain vulnerable to pressures.

The point, however, is that the country and its economy will always have problems. Except, the way things are right now, it appears to have more than a good chance of recovery. Several good decisions have been taken, others are going to be taken soon (introducing Company Law Bill and FEMA, among others) and the overall demand scenario looks good.

Only two factors are preventing industry from expanding capacity. One, the tremendous political uncertainty. Despite the bravado of a few chambers of commerce, it is unlikely that anyone would want to invest at a time when it is uncertain as to who will come to power tomorrow and whether existing policies will be reversed. The sharp surge in the Sensex, unfortunately, hides the fact that just a few scrips are doing well. Others continue to remain in the doldrums. That, however, will be the subject of the second part of this series.

FEEL GOOD FACTORS

* Further cuts take PLR of banks to 2 per cent below that a year ago.

* Following Reliance's bonus and FII frenzy, sensex at 52-week high.

* Agricultural boom, lower personal taxes and implementation of Pay Commission report to trigger demand revival.

* State governments agree to initiate tax reforms.

* Navratnas given complete freedom.

* 5 more industries delicensed.

* More progressive aviation policy likely

* New Company Law Bill and FEMA likely in monsoon session.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.