One of the most telling statistics of the dismal state of the economy lies in the figures for bank credit. Last year, between April 1 and end-June, bank credit to the non-food sector had expanded by Rs 16,485 crore. This year, non-food credit fell by Rs 3,126 crore over the same period.
The rapid deceleration can also be seen from the quarterly GDP figures. GDP growth fell from 6.2 per cent during the second quarter of 2000-01 to 3.8 per cent during the fourth quarter, a slide of 2.4 percentage points in just six months.
Going by the data on the six infrastructure industries released by the government recently, as well as the performance of the corporate sector, growth has deteriorated further in the last quarter.
Moreover, the trend continues to be downwards. In June, the growth in infrastructure was an alarming 0.3 per cent, far worse than the meagre 1 per cent growth for the first quarter as a whole.
The pessimism is deepened by the comatose state of the stock market, the crisis in the Unit Trust, the weakness of the financial institutions (IFCI being the prime example), the bankruptcy of state governments, the collapse of the tech boom, and the poor corporate results.
Given the intensity of the downturn, it is only natural for the government's revenues to be affected, and that is reflected in the lower tax collection data.
That, in turn, affects the government's ability to spend on infrastructure, so the Finance Minister's ability to loosen the purse strings could be very limited. The uncertainty about UTI's game plan for US 64 hangs like a dark cloud over the markets.
The new UTI chairman has said that he will not hesitate to sell, if other options are not open, and unless the Finance Ministry comes up with a concrete plan to dispel these worries, the markets will remain jittery.
What has gone wrong? The disaggregated picture of the GDP throws up some clues. Real GDP growth since 1994 has never been below 6 per cent, except for 1997-98 and 2000-01, when growth was 5 per cent and 5.2 per cent respectively.
In 1997-98, agricultural growth was a negative 1.9 per cent. Industry grew at 5.9 per cent, while services saved the day with a 9 per cent growth.
In 1998-99, however, GDP growth bounced back to 6.5 per cent, although industrial value added was a dismal 3.4 per cent, and services sector value added was comparatively low at 8.2 per cent. The star of the year was agriculture, which saw 7.1 per cent value added.
In 2000-01, value added in agriculture was 0.2 per cent, in industry 5.3 per cent, in services 7.7 per cent. In the fourth quarter of 2000-01, agriculture growth was negative, mining and quarrying grew by 1.9 per cent, manufacturing was 3.5 per cent, construction growth a miserable 0.7 per cent, and the index for electricity, gas and water supply moved up by 2.6 per cent.
So what could lead to a recovery? The 1998-99 example is actually reason for optimism, showing that if agriculture does well, so do the other sectors.
Support for that view also comes from the fact that agriculture in the last two years has almost been stagnant. Normally, high growth in agriculture in one year has been followed by a year of low growth, perhaps more a statistical phenomenon than anything else. 2000-01 was an exception to that rule. Given this logic, therefore, a good monsoon should kick-start growth.
However, that scenario is subject to a lot of caveats. One, a good monsoon is not enough---realisations too are important. Commodity prices are very low, and the FCI's grain mountain could have a dampening impact on prices.
Two, although the monsoons have been good so far, Orissa is reeling under floods and Andhra Pradesh is not getting all the rain it needs. Three, export growth is going to be much worse this year. Even China has posted a negative growth in exports recently.
On the flip side, however, 1998-99 saw negative growth in exports, a fallout of the Asian crisis. Fourth, although GDP growth was high in 1998-99, industry didn't do well at all, and we had to wait another year for an industrial revival.
And fifth, the slowdown in the world economy will impact our software sector. Thursday's figures for durable goods orders in the US showed that orders for tech goods slipped 3.2 per cent. They are now 35 per cent below where they were a year ago, back to 1997 levels, showing the extent of overcapacity in the tech sector.
There has been some buying in the FMCG sector since early June, and the BSE FMCG index has moved up about 8 per cent since then. That leaves plenty of scope for a rally in FMCG once there is more positive news about the monsoons.
But there's absolutely no hurry to get into into this market. There's a saying in the market----don't fight the trend. Right now, that trend is showing a flight to the safety of RBI tax-free bonds, LIC schemes, and bank fixed deposits.
