Supply-side policies pursued in the name of reform have triggered a recession, and industry, which finds its profits being squeezed, wants the Government to bail it out.
THE policy stance of Indian big business has undergone a slow but remarkable change. Till recently, different business lobbies wholeheartedly supported the Government's agenda of economic reform, involving the liberalisation of trade, a reduction of government current and capital expenditures and an emphasis on private initiative rather than public intervention. But when Prime Minister I.K. Gujral met industrialists in mid-October, their demands amounted to a call for a selective reversal of "reform". They expressed concern over unfair competition from imports, clamoured for an increase in government spending and called for public intervention in specific areas.
Some change in focus on the part of big business was to be expected. Having garnered the freedom and tax concessions which come with reform, it has to rely on expansion to sustain and increase pre-tax profitability. It is precisely at this time that the adverse consequences of liberalisation have begun to be felt. Foreign investors have turned more aggressive, willing to drop Indian partners who are not compliant. Competition from imports in sectors where quantitative restrictions have been removed and tariffs reduced has turned severe. The immediate post-liberalisation boom generated by a slow pace of fiscal adjustment and a sudden burst of demand for commodities not available earlier has tapered off. And the easy money available from the stock market in the first flush of financial liberalisation has dried up. As a result, large segments of private industry, which picked up huge concessions provided with the objective of making it the locomotive of growth, find themselves faced with decelerating output growth, rising unutilised capacity and obvious consequences for the bottomline.
THE recession in industry is now accepted as a reality by all except the Finance Minister, who claims to have "spotted" a recovery in September, but provided little evidence to support the claim. The reason is that, starting from the fourth quarter (October-December) of 1996, industrial growth, which was ruling at well above 9 per cent relative to the corresponding quarters of the previous year, fell sharply: to around 6 per cent initially and then to 2.6 per cent (January-March) and 5.46 per cent (April-June). While growth picked up in July, it still stood at just 7.17 per cent during April-July 1997 compared to the corresponding period of the previous year.
These figures are, however, deceptive. Some capital goods industries (such as those producing machinery for the power, fertilizer and textile industries) began to register a fall in orders well before October 1996 following competition from low-priced, branded imports in the wake of liberalisation. Since it was only a small segment of industry, dominated by the public sector, that was affected, much of big business was willing to accept what was dismissed as the inevitable pain of restructuring.
Further, since these industries were part of a capital goods sector that included automobiles and certain electrical and electronic items that were registering domestic production growth based largely on imports of components and parts, the index of capital goods production did not reflect the displacement of sections of domestic industry. Finally, since investment and intermediate and component imports in consumer goods production was liberalised while the import of final consumer goods was protected, that sector was also partly insulated from the adverse consequences of reform.
Two factors helped spur growth in these sectors. First, despite claims of fiscal adjustment, the Government maintained its expenditures at levels that took the fiscal deficit in 1993-94 to levels that were close to what prevailed in 1990-91. It was only subsequently that a combination of tax concessions and more strict adjustment curtailed government current and capital expenditures substantially.
Secondly, liberalisation saw the release of pent-up demand for a range of consumer goods among a section of the population that till then had desired these international brands but was unable to buy them in the domestic market. Past savings and rising consumer credit fuelled a once-and-for-all boom in these markets. It was at this time that sections of Indian business went in for "strategic alliances" with international firms to benefit from the "new markets" that liberalisation was unleashing.
It is clear now that that boom has come to an end. Not only has financial reform made it difficult for the Government to exceed fiscal deficit targets substantially, but the once-and-for-all post liberalisation release of pent-up demand has virtually dried up for most commodities. This has resulted in a generalisation of the demand recession, which now affects the consumer goods sector and almost all capital goods industries, including automobiles. For a Government whose policy is based on the perception that supply-side factors are crucial to growth, this demand determined deceleration in industrial growth is difficult to swallow. But for industry that finds its profits being squeezed, such ideological niceties matter little.
NOT surprisingly, therefore, the so-called captains of a liberalised industry are now clamouring for better "demand-management" on the part of the state. The manner in which they do so, however, reveals their narrow perspective. They criticise the Government's inability to curb pay increases for public sector employees in the wake of the Fifth Pay Commission's recommendations, while hoping that payment of arrears would help prop up sagging consumer demand. They demand larger public capital expenditure - but only in infrastructure and housing, so that it would increase demand for basic goods such as steel and cement. They want the Government to force consumers to "dump" old passenger and commercial vehicles - not just to prevent environmental pollution but also to boost demand, while still opposing any effort by the state to regulate industry by referring to benefits that a free market ostensibly delivers. Finally, they want the Government to strengthen the anti-dumping mechanism as well as regulate imports of second-hand capital goods, while refusing to declare themselves openly in favour of greater protection.
This hypocrisy stems from the fact that each big industrialist wants government intervention and support so long as it is in his favour, and opposes it when it affects him adversely to the slightest extent. This created no difficulties so long as the "intervention" being demanded involved a withdrawal of the state from production or a reduction in tax rates, since it benefited some or all while harming none. But once intervention involves benefits for some and adverse consequences for others, the fragile unity presented through lobbying bodies such as FICCI (the Federation of Indian Chambers of Commerce and Industry), CII (the Confederation of Indian Industry) or Assocham (the Associated Chambers of Commerce and Industry) collapses.
This was visible when the meeting with the Prime Minister deteriorated into a public voicing of disagreements between the industrial magnates and between the lobbies representing them. Groups such as Reliance and Essar that are benefiting from duty-free import of capital goods in the fertilizer and oil refinery sectors not only charged the CII of misguiding the Government regarding the adverse consequences of such imports for the domestic capital goods industry, but argued that domestic manufacturers were not interested in producing all of such equipment but wanted to be the middlemen who would import them. The fracas forced the Prime Minister to mediate and announce that he would constitute a group that would review the duty structure and seek to meet legitimate demands for protection without harming user-companies.
The Prime Minister went further and promised that he would seek to boost sagging demand by increasing public expenditure on infrastructure. He also said that an attempt would be made to spur construction activity in the private and public sectors by reviewing the Urban Land Ceiling and Regulation Act and getting the Ministry for Urban Areas and Employment to find ways and means to increase housing stock in the country.
IMPLICIT in all this is a recognition that supply-side policies pursued in the name of reform have triggered the current recession. What it calls for, therefore, is a rethink of the reform itself. But neither the Government nor industry are willing to come clean on this count. Suspecting that the discussion is heading in the direction of such a conclusion, Planning Commission member Arjun Sengupta reportedly intervened to declare that the industrial slowdown was "temporary" and should not trigger reactions that implied a reversal of reform.
This idea of staying with reform while seeking to stimulate demand for capital and consumer goods was crystallised in the idea that the Government should "re-prioritise" its expenditures. It takes little economic or accounting skill to realise that this would involve cuts in a range of welfare expenditures and subsidies to find the resources for the new allocations, given the commitment to both low direct taxes and low fiscal deficits. If such cuts are inadequate, indirect taxes and administered prices can be further raised to garner the requisite resources. This belief that a policy that ensures a changed expenditure pattern and higher prices would serve to stimulate overall demand is not grounded in economics, but influenced by the need for an ad hoc response to a problem whose true cause both government and industry refuse to recognise.
In the process, the burden of an ad hoc response to the crisis would in all likelihood fall on the poor and the middle classes, who would be adversely affected by a further cut in welfare expenditures and subsidies. This attempt on the part of industrialists to sort out their problems, without taking a strategic view and at the expense of other sections and of the nation, is in keeping with its history. The difference is that this time around the Government is accepting the views of India's partisan big business sections not just implicitly but explicitly.