The notion of a recovery has come in for a close look in the last few weeks, partly as a result of weak first quarter results from many corporates, a depressing report of a production slowdown by CII-Ascon, and a dispirited stockmarket. But on the credit side, the strongest indicator of a recovery has come from the credit offtake figures. Growth in non-food credit plus bank investment in corporate paper has been over Rs 17,000 crore this fiscal, compared to a mere Rs 800 crore or so over the same period of 1999. Year-on-year, the increase has been 22 per cent. This money is not going to the asset markets, for the simple reason that they wouldn't be so depressed if that was happening. Part of it must have been mopped up for the funds-starved oil companies, who have been deprived of price increases for their products by the government. Part must have gone towards substituting foreign currency borrowings, a natural consequence of the rising interest rates abroad. And some of it must have gone into sectors such as housing or cellular phones, where the demand is not going to show up in corporate financials. And after taking these factors into account, the rest of the credit growth seems to have been used in working capital. A study of first quarter corporate results by this newspaper showed that topline growth of a sample of 905 companies was 21.7 per cent. The fact of the matter is that the Indian economy is changing from an industrial to a service economy""witness the growth in e-commerce, call centres, retail chains, the telecommunications backbone""and that change is yet to be captured by the currently available data. Hence the anomaly between good GDP growth, a shortage of skilled people, and other indicators of a robust economy on the one hand, and market pessimism on the other.
Will higher returns on capital offset the higher cost of capital? The answer lies in the strength of effective demand. It is entirely possible that the current slowdown in some industries is merely a fallout of the drought conditions prevailing earlier in the year. Demand is then likely to rise in tandem with a good monsoon, even if interest rates climb higher. After all, interest rates had to climb very high indeed in 1995-96 before the RBI's liquidity tightening measures started to bite. But even if demand does increase, the changing nature of the economy will mean that an old-style recovery, which lifts all boats, is probably a thing of the past.