Bell-Wether Industry
There is unlikely to be any better bell-wether indicator of the state of the economy than the predicament of India's heavy engineering industry. Pre-tax profits gave way to losses last fiscal, in this crucial capital goods sector, and growth in both major segments "� electrical and non-electrical machinery "� was less than 5 per cent over the previous year's figures. The sector has been a surrogate sufferer as demand from several key sectors of the economy "� steel, process industries, automobiles "� has dwindled sharply.
Not all the blame for this dismal outlook, however, can be ascribed to recession. Erratic government policy, especially towards infrastructure, the one sector that could have spurred growth, has been equally responsible. As The BS Reader showed last week, power equipment manufacturers, which ranked among the fastest-growing segments of the business till 1995, have been troubled by large-scale cancellations of orders as the government backtracked on such vital elements of power policy as fuel linkages for independent power producers and power pricing. For steel equipment makers the problem of barren order books has been worsened by growing congestion at ports, which hampers their access to imported intermediates.
There is no doubt that these are all valid problems for heavy engineering firms. It is equally true, however, that like most of domestic industry, the sector is also suffering the pains of economic reform. Today, heavy engineering firms are bitter because they claim that they have been forced to ricochet from protectionism to openness without being given the chance to adjust. For instance, they complain that the 15 per cent price preference that the government routinely extended to domestic bidders pre-liberalisation has gradually been removed. This has been aggravated by the fact that local imposts on capital goods -- sales tax, octroi and the like -- have not been cut back. They allege that this has left them prey to merciless global price competition. Local taxes give domestic companies as much as a 12 to 24 per cent price disadvantage over foreign competition.
All these complaints overlook the crucial fact that India's heavy engineering companies in general have rarely had to look at such basics as cost and quality, as long as import barriers were up. No better sign of this can be had from the energetic restructuring that is taking place on factory floors from Mumbai to Chennai. For the first time, private sector companies are turning their focus outward and looking at global markets for sustenance; many are even willing to sacrifice margins to build their markets. Then again, quality movements have become all the rage and cost-cutting a new incantation. Even public sector behemoths, confident winners in the licensing and price preference era, are now grappling with such unfamiliar concepts as backward integration to turn lean and competitive. In the machine tool industry, fierce competitors of yesterday are collaborating to develop a vendor base to combat the onslaught from Taiwan. Clearly, despite all the reproaches, hard times are forcing India's cosseted capital goods makers to reform. For that, at least, they should be grateful.
To some extent, the government has eased the way for the companies by extending deemed export benefits for supplies to major industries; indeed, this removes a major complaint that the domestic capital industry was voicing, namely that permission for zero duty imports of capital goods for projects like oil refineries placed them at a considerable disadvantage, given the absence of countervailing duties. Now that this specific problem has been addressed, and with the companies themselves paying serious attention to competitiveness issues, the next couple of years could well see a change of fortunes--provided of course that major projects get started and orders start flowing.