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Some good news, and some bad

July 12, 2003

Judging by recent headlines, all those who have been forecasting an end to bad times, and the start of a genuine upswing, may be getting vindicated.

The monsoons have fortunately recovered momentum and no one now expects a drought this year -- removing the biggest cloud on the short-term horizon.

The stock market has shaken off its despondency (check how many analysts had forecast that the Sensex would be nearing 3700 in July!), and the fever set off by the Maruti issue suggests that even the primary market has new life in it -- so much so that both the government and the Tatas are readying to float new paper and thereby promising more excitement.

Corporate results have been most flattering, and the latest quarterly numbers from Infosys have punctured the doubts about software's future.

The rupee continues to gain ground against the dollar, reflecting strength in trade as well as growing international optimism, with the latter causing new investment money to come into the Indian market.

Those who may have been worrying about renewed inflation in March, when the wholesale price index was climbing at a rate of more than 6 per cent, will be sleeping more peacefully now.

And consumers are spending like there's no tomorrow, when they find attractive offers: the record 1.2 million new telephone connections in June suggests very strongly that there is a huge market out there.

So do the upbeat numbers on car sales. The banks, meanwhile, have demonstrated a welcome turnaround, and there is fresh zing in many old economy sectors. Interest rates could be lower without doing harm, but after a long time they are at least reasonable.

And the coming boom in the market for office space suggests that businesses are expanding like never before.

Even if much of the space is linked to software and BPO growth, and is therefore banking on a narrow base, the fact is that more offices mean more jobs and more consumers.

Most of this suggests the makings of a swing from self-doubt, if not outright pessimism, to renewed optimism. But that unfortunately does not mean that the macro-economic numbers will take off on a different track.

This year's GDP growth numbers may eventually look good because of last year's low base and the possibility of abnormal growth in agriculture, but even if we hit 7 per cent growth this year (and that is a bit of a stretch at the moment), the two years taken together will not deliver average growth of much more than 5.5 per cent -- which is no better than the average of the past two decades.

Indeed, with exports slowing down after last year's cracking pace, and likely to slow still further because of the strengthening rupee, and with the manufacturing sector stuck in the 6 per cent range, many businesses will find that they can enjoy recovery and growth, but not a boom of the kind last seen in the mid-1990s.

Everyone knows what is required to convert the recovery into a boom: fresh investment and sharp improvements in productivity. Unfortunately, the investment numbers still look pretty run-of-the-mill.

The turnaround story in Indian manufacturing is still confined to a somewhat narrow band of companies; the investment in infrastructure is mostly in the road programme, with the budgetary promise of an infrastructure boom not yet materialising; agriculture has suffered from an invest famine for more than a decade, and nothing has been done on the policy front to change this.

As for improving productivity, the fact that the government is into election mode means that none of the reform measures that might be expected to improve this key derivative should be expected in the next year-and-a-half.

Not labour reform, not privatisation, not tariff reform (which might encourage imports and help correct the trade balance and therefore prevent the rupee from continuing to climb), and of course not power reform.

Which is a pity, because the momentum of a recovery provides opportunity for taking some hard decisions that seem unthinkable when things are already looking bleak. In today's environment, those decisions would have given a sheen to the Indian story that it lost some seven or eight years ago.

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