Where is the economy headed?

Raghuvir Srinivasan

THIS is the question uppermost in the minds of those following the economic and corporate developments in the first quarter this fiscal.

There are contradictory signals from the various macro-economic indicators and the financial performance of the corporate sector in the April-June period.

If the 28 per cent rise in exports, the buoyancy in tax collections and the 25 per cent drop in fiscal deficit are encouraging, the sudden downturn in the fortunes of critical sectors such as automobiles, cement and oil-refining, and the rupee volatility indirectly leading to a rise in interest rates, are ominous.

First the positive signs: The biggest news is that the fiscal deficit in the first quarter was down 25 per cent compared to the first quarter of fiscal 1999-00. At Rs. 25,073 crores, the fiscal deficit is just about 22.5 per cent of the budgeted figure of Rs. 1,11,275 crores for fiscal 2000-01. This has come about due to a combination of factors -- lower interest payments, a tight leash on non-plan expenditure and buoyancy in revenue collections.

Corporate tax collections were up by a hefty 75 per cent at Rs. 4,686 crores in the first quarter, while indirect tax collections were higher by 12.25 per cent in the same period. The 13 per cent growth in excise duty collections is nothing exceptional, but it certainly indicates that the manufacturing sector is doing fine. The 11 per cent rise in Customs collections should be seen in the perspective of the prevailing high crude prices because of which the oil import bill has gone up, leading to higher Customs revenues.

Yet another encouraging aspect is the 28 per cent rise in exports in dollar terms in the first quarter which pushed the total past the $10-billion mark. Except for marine and plantation exports, the other sectors seem to have performed well enough. Imports have simultaneously gone up by 27.25 per cent to $13.17 billions, much of it accounted by oil. But the interesting fact is that non-oil imports are up a healthy 10.95 per cent to $9.24 billions, which means that project imports and that of raw materials have increased. This is a healthy indicator of the investment plans of the manufacturing sector.

The financial performance of the corporate sector in the first quarter has also been quite impressive with a bottomline growth of 31 per cent and top-line growth of 28 per cent registered by a total of over 900 companies that have declared their results till now (see analysis on Page 7). Of course, the information technology sector has had a major role in boosting the growth figures but analysis reveals that growth has also come from the traditional manufacturing, fast-moving consumer goods and pharmaceutical sectors.

In fact, the 50 per cent rise in tax provisions by these companies in the first quarter to about Rs. 2,100 crores is a good indicator of the corporate sector's perception of the prospects for the ensuing part of this fiscal. Of course, some part of this tax provision could be attributed to the corporate dividend tax, the rate for which was doubled in the last Budget to 20 per cent.

Capping all these positive factors is the good progress of the South-West monsoon which is reported to be ranging from normal to exceptional in all the critical regions of the country. This certainly augurs well for the prospects of the kharif crop and should lead to a rejuvenation of rural incomes which took a hit last year.

If so many positive factors abound in the economy, then why the worries? These are due to a combination of factors such as the negative growth registered by the commercial vehicles segment leading to hefty losses for the major players, a steep fall in growth rates registered by the oil refining companies and a slowdown in cement production and despatches. Adding to this is the rise in interest rates and crude prices which is widening the deficit in the Oil Pool Account.

Commercial vehicle sales is sensitive to the economy's performance which is why its sliding fortunes is a cause for concern. But the important point is that the commercial vehicle demand is down, not so much due to a fundamental slowdown as to artificial ones, such as problems caused by the uniform sales tax structure which has pushed up the final cost of the vehicle. This is over and above the rise in prices caused by the shift to Euro II norms, as per statutory requirements. Some amount of market dissonance caused by past over-supply from a major manufacturer also seems to have contributed to the reduced sales now. If there are fundamental factors contributing to reduced sales, then they are not as yet evident.

Similarly, the fall in the performance of the oil refining companies is again linked to an artificial factor. This is the increased depreciation charge caused by the companies writing off the entire capital cost of LPG cylinders for new connections. Earlier, there was a cylinder price reimbursement scheme in operation, wherein the Government compensated the oil companies for the cylinder cost. This has now been done away with, leading to a heavy load on these companies. Of course, it is also true that refining margins have become thinner, following the sustained rise in oil prices, dragging profits down. There are also worries caused by the drop in production and despatch of cement in July over June but it is too early yet to identify a trend in this.

The real factors to watch for would be the effect of the increase in interest rates effected by the Reserve Bank last month to stem rupee volatility. ICICI Bank and Dena Bank have already raised their prime lending rates though the State Bank is yet to decide on the issue. There is no question that interest rates are bound to go up, which means there will be pressure on corporate bottomlines for the rest of this fiscal.

An added worry is the rising Oil Pool Account deficit, which is now Rs. 7,500 crores. This may force the Government's hand in adjusting product prices once more which will push up costs down the line. In fact, if one were to include the Oil Pool Account deficit in overall government finances, then the 25 per cent drop in fiscal deficit in the first quarter may just dissolve into thin air.

The overall picture for the first quarter appears optimistic. But there are quite a few worrying factors for the immediate weeks ahead. This is also reflected in an NCAER survey of industry captains which shows a dip in the business confidence index. The current quarter may prove to be critical and may decide the trend for the rest of this fiscal.