Economic Highlights

New Delhi, 5 June 2009

Contradictory Signals

ECONOMY NOT ROBUST

By Shivaji Sarkar

The core sector “growth” has created euphemism. But it needs to be observed with caution. It is not an indicator of a turn-around although it is being projected like that. It has to be seen against certain hard facts. The corporate tax realisation has come down. Jobs are not growing and the Government’s borrowings are likely to spiral.

The signals are certainly not positive. True, to boost the morale of the people it is necessary to scout for positive trends. However, the global economy has not shown any betterment. Also true that the Indian economy need not follow global financial markets but it is unable to unshackle itself from it.

The President’s address to the joint session of Parliament has set forth promising goals but one aspect has been overlooked. It is not necessary to read too much into the core sector “growth”. It is a year-on-year account. Power, crude oil, refinery products, coal, cement and finished steel grew by 4.3% as per the April statements.

Recall, it had fallen to 1.1% in December last. But make no mistake. It is not 3% additional growth. It includes the figures of the normal growth period during the initial moths of 2008. After July it had dipped to 2.7 %. The pick up after December is minimal. The projection is less real and more of statistics.

The euphoria for these six items has a reason. These contribute 26.7% to the Index of Industrial Index. Similarly, it is being touted that the fast moving consumer goods (FMCG) sector is moving faster. In April-May, it is said, key product segments such as soaps, detergents, toothpastes, biscuits, snack foods and soft drinks have seen a volume growth of 20%. This has been ascribed to lower prices. Basically biscuits, snack foods and soft drinks have added to this growth.

In a way it has become a consumers’ market. Most companies have lowered or maintained prices instead of raising them as they do every season. Thus busting the myth of the companies that they are forced to increase prices for a “host of reasons”.

It is very simple. Lower prices generate demand. If the players stop fleecing consumers there is always a chance of better growth. But this does not establish that there is real growth. At best it can be said to have brought the normal consumers back into the fold. It should be a good lesson for the FMCG players. But would they adhere to it and overcome their greed? This also calls for introduction of a price regulator for these products and a strong consumer movement.

This apart, one aspect has escaped notice. The FMCG players have tricked the consumers in a different way. They are giving less in terms of weight for every packet sold. Be it a chocolate, biscuit, soap, drinks or detergent. Whereby the profit of the FMCG companies has increased even during the bad times. Otherwise too the FMCG demand is always maintained at a level so not much should be read in the seasonal growth. It is likely to plateau in a month or two as the weather changes.

Apparently some modest growth in cement and steel is being seen on public spending. But the onset of the monsoon is likely to dampen this. Needless to say, the Government has to take note of the reality as well. Scandalously, the Delhi Development Authority (DDA) last month rewarded a company that had failed to fulfil its commitment of constructing a housing complex for the Commonwealth games village. Instead of realizing penalty from it, the DDA purchased the complex for Rs 700 crores.  It is not only a clear outgo of public funds. But it needs to be probed as to who has benefited from the deal.

More. India’s largest real estate company, DLF is easing out of its SEZ projects. Similarly, many other companies are also reneging on their commitments. The plight of General Motors laden with bankruptcy is well known. The Tata’s are also not in ship-shape. Many others companies too are riddled by similar problems. All resulting in a reduction of jobs.

In fact, the spectre of job loss and salary cuts is haunting the nation. In such a scenario, the so-called best show by the core sector is hardly a relief. According to industrialist Rahul Bajaj 2009 would continue to be a difficult year for the Indian industry.

There is yet another concern.  The Central Government has promised an all-round activity for different segments of the society. For that it requires funds. But the trend being seen in the corporate tax payment invalidates that hope. The cement, construction and engineering industries have provided for lower taxes flowing pre-tax profit. The tax provisions of 13 cement companies have declined by as much as 25.4% in 2008-09 adding to about 19 % fall in pre-tax profit. The tax provisions of 10 construction companies have declined by 11 to 14%.

Further, the overall corporate tax collections, which account for about two-fifths of the Government’s total revenue receipts, reportedly have fallen short of target. The aggregate pre-tax profit has increased by 6.7% in 2008-09 against 30 % in the previous year. Only the banking sector is paying more taxes.

According to CMIE data, there is hardly a company which is paying higher taxes. Almost all companies are paying taxes at a much lower level. Some companies are paying 68% less than what they had paid in the last year. Most others are paying 30 to 40% less.

All in all, the Finance Minister Pranab Mukherjee is likely to have an extremely difficult time preparing for the budget as per the guidelines set out in the President’s address. Each of his action has to be supported by finance. If he cannot get it from revenue generation the Finance Minister would have to resort to borrowings. Whether that would give a necessary push to the economy remains in the realm of speculation. --- INFA

(Copyright, India News and Feature Alliance)