The balance sheet of the revival story, with both credits and debits as on date are given below.

The data clearly supported a robust recovery in the first quarter of the year, with GDP growing at 5.5 per cent. The Index of Industrial Production data corroborate that story, with the April to August growth being 6.0 per cent, as against 4.2 per cent for the same period last year. Indirect indicators, such as the rate of growth in non-food credit plus bank investment in corporate paper (which measures bank exposure to corporates) supported the revival story.

For instance, the growth in non-food credit plus corporate investments was higher by Rs 4,699 crore for the period April to August 1999 over the growth notched up for the corresponding period of last year. By end-September, however, that lead had narrowed to a mere Rs 252 crore, indicating a major slowdown in credit growth.

That slowdown is borne out by data on railway freight. Growth in railway freight during August 1999 was 4.2 per cent year-on-year, compared to 9.8 per cent in July, and double digit increases during the previous two months. As a result, total growth in railway freight traffic for the period April to August 1999 was 8 per cent, lower than the 9 per cent growth during April to July.

The growth in year-on year production of cement too was lower in August. Moreover, cement production was lower in September than in August 1999. But the picture is not all one-sided. Several sectors did better in August. These included the entire automobile sector, with cars, HCVs, LCVs, motorcycles and even scooters having a higher rate of growth in August than in July.

The news on the other fronts is mixed. The government's tax revenues for the period April to August 1999 are lower than those for the same period of 1998. Non-oil non-POL imports are lower than last year's. But while non-oil non POL imports declined by 4.07 per cent in the first five months, this is better than the negative growth of 6.1 in the first four months. Export growth at 4.4 per cent is better than last year's dismal showing.

Also, the disaggregated IIP data do not show so rosy a picture for August 1999. It will be seen that while the growth in the manufacturing IIP for August 1999 was 6.1 per cent, it was lower than the manufacturing IIP for the period April to August 1999, which was 6.7 per cent. That means the manufacturing IIP for August is pulling down the average, which indicates a slowdown in August.

Economists point out that the depressed state of the value indicators show the effect of lower prices. For example, the growth in credit must be adjusted for the rate of inflation, and inflation last year was much higher than inflation this year. That means real growth this fiscal is higher than last year, inspite of about the same rate of growth in nominal credit. The robust increase in the Index of Industrial Production, which is a measure of volumes, is thus offset by the low inflation rate.

But this theory doesn't explain the change in the credit offtake from August to September. And even if the increase in production is not accompanied by higher prices, would it result in lower excise duty collections?

What can the new government do to help matters? Given the tentative nature of the recovery, the most important thing for the government is to ensure adequate purchasing power. The increase in total expenditure compared to last year (5.9 per cent by end-August) has helped sustain the recovery. While switching expenditure to infrastructure from non-productive uses is fine, any reduction in overall expenditure will hurt demand. Excess capacity still exists in a whole lot of industries, and reducing expenditure at this point of time is unwarranted.

But there is a fear that with a high fiscal deficit, interest rates would be pressed upwards, aborting a recovery. It is true that the rate of growth in bank deposits has fallen. Excluding the RIBs, the rate of growth was 7.6 per cent for the first half of last fiscal, compared to 6.7 per cent for H1 this year. The difference is about Rs 15,521 crore. A cut in CRR could take care of that shortfall.

So a pruning of the fiscal deficit at this stage is unnecessary. If growth spurts, the deficit will take care of itself. While disinvestment must be pushed for all it is worth, the proceeds must be spent on infrastructure. By next month, it is to be hoped that the good kharif crop will impart a second boost to rural spending, prove that the slowdown was a blip, and lead to a full-fledged recovery.

Balance sheet on the industrial recovery

As on October 13,1999

Credit