Braving a slowdown?

Raghuvir Srinivasan

ARE we really in the midst of an industrial slowdown? The Reserve Bank of India (RBI) may have acknowledged the fact when it revised the economic growth projections for this fiscal downwards to 5-6 per cent compared to 6-6.5 per cent earlier.

Conversations with industry captains would reveal tales of woe about how their companies are seeing a fall in sales and realisations, about how profits are taking a hit from rising costs and so on.

Yet, the first flush of corporate results for April-September 2001 reveal otherwise. The performances of some of the bellwether companies such as Infosys Technologies, Ashok Leyland, Larsen & Toubro, Bajaj Auto, ITC and Wipro in the first half of this fiscal hardly point to a slowdown. Yes, the growth figures are lower, especially in the case of the information technology companies. However, they reflect the slowdown not in the Indian economy but in the US from where they derive a major part of their business.

Significantly, companies that are linked to the domestic economy, such as Bajaj Auto, Ashok Leyland, Tata Power, Hero Honda and ITC, have all returned good performances given the overall depressed environment. It may be tempting to ask what is the slowdown that everybody is talking about.

But then there are a number of major companies that have yet to declare their results such as Reliance Industries, Tata Steel, Tata Engineering and cement companies such as ACC and India Cements, not to mention oil companies such as Hindustan Petroleum, Bharat Petroleum and Indian Oil. The performances of these companies are expected to reflect the difficult economic conditions that prevailed in the last six months. They could well tilt the overall picture of corporate performance.

Be that as it may, what is the outlook for the remaining part of this year? Are we headed towards more difficult times as suggested by many, including the RBI? Or are things beginning to change for the better?

Though the overall environment does remain depressing, recent events appear to hold out some cause for cheer. We have just had an excellent monsoon which was good in terms of both precipitation and spread. The last year had seen good precipitation in select pockets leading to a drought in the other areas. Fortunately, this year has seen good rainfall in those areas which were afflicted by drought conditions. This should augur well for the agrarian economy.

Second, the sales figures of two major economically-sensitive industries - cement and automobiles - are showing first signs of growth. Cement offtake in August and September 2001 was up by 12 and 16 per cent respectively which is interesting considering that the monsoon months are traditionally lean for the industry. The ongoing reconstruction in Gujarat and the national highway projects, which appear to be taking off slowly, are expected to spur further demand for cement in the second half, which is traditionally strong for the industry.

Similarly, sales of heavy commercial vehicles, which reflects goods movement in the economy, has shown a sequential month-on-month rise in volumes since July 2001. Of course, passenger car sales are down 6 per cent in the first half but then so are sales of consumer durables and white goods which is illustrative of a drop in consumer sentiment.

Finally, that critical factor which could tilt the economy into the abyss - oil prices - appears to be on the retreat. The last month-and-a-half, since the terrorist attacks on the US, has seen oil prices steadily decline from beyond the $25 per barrel mark to the sub-$20 per barrel level now. Of course, this drop has got a lot to do with the slowdown in the American economy which is the biggest energy consumer in the world.

But it is interesting to note that oil prices are retreating even in the approach to the winter season when it traditionally hardens as the West stockpiles oil for winter use. It is clear that unless the cartel of nations driving prices- the Organisation of Petroleum Exporting Countries (OPEC) - intervenes to cut production, oil prices will remain subdued in the near term. But even assuming that the OPEC cuts production, effect on prices is not expected to be big. They may still rule under $25 a barrel. This much is evident from the prices quoted for future contracts in the benchmark Brent blend crude oil.

For the Indian Government, careening under the massive Rs 14,500 crore deficit in the Oil Pool Account, this should be good news. Soft oil prices mean less of a problem in the Pool Account. The stock of the deficit will be taken care of by the issue of Oil Bonds as already decided by the Government, while the flow will, hopefully, be small in the next six months given the soft oil prices. At this sensitive point for the economy stability in energy prices is vital and this will probably be ensured now.

Over and above all this, the RBI has also chipped in with its bit to further soften interest rates in the economy. Though banks have yet to follow through with the RBI's bank rate cut signal, they will probably do so sooner rather than later. This should address a major complaint from the corporate sector, justified or otherwise, about high interest rates hampering growth. The RBI's act now shifts the onus on the corporate sector to deliver.

Amidst all this, the one major worrisome factor is the depressed consumer sentiment. There just does not seem to be buyers for consumer appliances such as televisions, refrigerators, washing machines and of course, passenger cars. For an economy that runs so much on sentiment, the lack of enthusiasm amongst consumers should be worrying. The consumer durables industry is looking to the festival season, when sales traditionally peak, for succour. Whether this happens could well lie in the answer to the question raised at the beginning: Are we in the midst of a slowdown?

Pic.: The RBI Governor, Mr Bimal Jalan, has revised growth rates downwards.