The finance minister has begins this year's Budget exercise on an uncertain note. Economic reforms are stagnating because the government is unwilling to take tough decisions and unable to manage change. To his credit, Yashwant Sinha had the deficit under control. but by slashing capital expenditure.
As Sinha begins to frame his Budget, the GDP forecast for India has already been cut from 6.5 per cent to 5.7 per cent. US economic indicators too have confirmed a slowdown after 10 years of relentless growth.
This is bad news for India, especially since it coincides with the removal of quantitative restrictions under the WTO regime and exposes the Indian market to a flood of cheap imports. All in all, a difficult situation which is compounded by the pressure of divergent political agendas and the absence of a clear direction.
Let us look at a few areas of concern:
The second year of deficient rainfall in 30 out of 35 meteorological sub-divisions promises yet another drought in many states. The fact that government godowns are overflowing with grain will have an impact on procurement prices and aggravate the problem. With farmers already reeling from water scarcity and low product prices, it is difficult for the government to touch the sensitive issue of agricultural reforms and subsidies this coming year. The drought will also affect rural consumption.
Large chunks of the manufacturing sector face an uncertain future. One the one hand it grapples with old problems like high input costs, shoddy infrastructure facilities and low labour productivity. On the other it faces the threat of cheap imports from China and other countries. In fact, except for cement, where the industry has formed a cartel to boost profits by cutting production and hiking prices, most other sectors face uncertainty.
The slowdown of the US economy and a reduction in orders is bound to affect our brightest hope -- the Information Technology sector. During the yearlong bull run in tech stocks (which recently cooled down) and dot-com mania (and its inevitable bust), the IT sector made expensive investments in infrastructure to sustain rapid growth.
The depletion of their order book because of the US recession will have a big impact on profits unless companies double their effort to tap new non-US markets which they have ignored until now because of operational inflexibilities and language difficulties.
Except for the telecom sector, which has witnessed real change, infrastructure development is bogged down by the inability to push through reforms. Most infrastructure projects, whether in power, dams, water transport, port privatisation or highways, are either bogged down by controversy or unclear policies and half done reforms.
The power sector is the best example. State governments which rushed to clear expensive Independent Power Projects with guaranteed returns, without addressing issues such as theft, transmission losses, subsidies and pricing of power for agriculture are now battling controversial payment issues, best exemplified by bankrupt Maharashtra's struggle to pay the Enron Corporation.
Last week Finance Minister Sinha conceded what was long obvious to everybody else -- that public sector divestment targets would not be met again. The government, having unceremoniously dumped the Divestment Commission and created a separate ministry to accelerate the process, has made no headway despite two dynamic ministers holding this important portfolio.
It also accepted the DC's suggestion that the divestment process should be separated from the Budget exercises, but that too failed to work. Ever since the ministry was set up, the DC has only managed to divest the loss-making Modern Foods during Arun Jaitley's tenure.
VSNL, Maruti Udyog and Air-India have only proved that Arun Shourie's erudition, bluntness, honesty and commitment are no match against the machinations of his ministerial colleagues driven by powerful vested interests.
Banking & NPAs
The past few weeks provide some vivid contrast. The newly commissioned private sector banks demonstrate the positive impact of market forces and competition. In a few short years, these banks have had to maintain a relentless pace of growth and find ways to accelerate it further through mergers.
Times Bank kicked off the trend when it merged with HDFC Bank, ICICI and Bank of Madura plans to merge and UTI Bank and Global Trust Bank are the latest to announce marriage plans. This too will be an interim phase in their rapidly evolving structure, when institutions such as ICICI and IDBI convert to universal banks and probably insist on merging their banking subsidiaries.
On the other hand, government indecisiveness combined with the lack of foresight among trade unions continues to tie down public sector banks. While the government continues to debate divestment and retaining the public sector character of nationalised banks, they are rapidly losing market share to better technology, speedier decision making and the high service standards of private banks.
The rush of nationalised banks employees to grab voluntary retirement schemes has created some panic among bank managements, but it is not clear if the government or the trade unions are awake to its significance. Clearly, employees are fed up with safe but dead-end jobs and the incentive of a comfortable nest egg is encouraging thousands of them to seek other opportunities.
Instead of merely lamenting the trend of burgeoning bad loans, this is the time for Yashwant Sinha to negotiate with the unions and political parties to push through reforms and divestment by offering incentives such as employee stock options.
What does all this mean for the stock markets?
They continues to fluctuate wildly as analysts grapple for global indicators and punters look to Nasdaq for direction. But Nasdaq is as fickle and even more volatile than the Bombay Stock Exchange Sensex and cannot be a reliable trendsetter.
The good news is in the re-rating of old economy stocks by fund managers. Having had a good run with IT stocks they are under pressure to maintain performance by finding new investment opportunities. But there is little indication that old economy stocks can be pushed much further. Except the cement companies whose cartel action has led to tangible profits, most other sectors show no promise of improved demand or performance.
It is up to the finance minister to provide direction and to create the momentum for spurring industrial growth. Analysts hope the forthcoming election in several states will lead to infrastructure spending which would benefit old economy companies. But this may be turn out to be an over-optimistic expectation unless the Centre steps in with some projects. There is also an expectation that the liquidation of the oil pool and bringing forward the Administered Price Mechanism by a year (to April 2001) may clear the path for reforms in the oil sector.
If Sinha keeps his promise of announcing changes which are expected to bring in investment of '$ 100 billion in the next 25 years,' then oil companies and consequently stocks can look forward to an upsurge.
The bottomline is we live on promises and hope that Sinha and his new team will deliver a Budget to kickstart reform, push divestment and re-activate the economy in adverse conditions.