Recessionary Trends
Sales in the first-half of 1996-97 grew at a rapid 15.20 per cent. This was partly the result of the lower base in the comparative period of the previous year. This was known but most indices of corporate confidence in the recovery process were suggesting resurgent growth impulses. However, growth dropped precipitously in the second half, down to 7.4 per cent. The year thus closed with a none too unhealthy growth rate of 10.4 per cent. But that double digit figure is misleading; the fact is companies are looking at a continuing recessionary phase. For one, they are saddled with massive stocks of finished inventory at the end of March 1997, since they had stepped up production on the back of an upbeat first half. Then, manufacturing costs have increased by a strong 12 per cent in 1996-97 as a result of the cascading effect of freight and fuel price hikes (coal and power). Operating profit in the second half shows a fall of 1.5 per cent, as manufacturing cost increases outstripped sales growth in the latter
part of the year. There is also the fact that raw material costs are far less sensitive to demand than finished goods.
The savings grace in the second half of the year was that interest rates started looking downwards. Interest costs increased by a modest 21 per cent in the second half, as against a phenomenal rise of 33.6 per cent in the first half. This is perhaps due to the fact that industry borrowed high cost funds from outside the banking system in the first half of the yearas evidenced by the sluggish offtake in bank credit. Accounting for the higher tax burden due to the first time imposition of minimum alternate tax and interest, net profits of the 600 companies actually plummeted 12.7 per cent in 1996-97.
Early signs for this year indicate that industry may only report marginal improvements, bulk of it because of the cut in tax rates. Consumer demand for industrial goods still seems to be lukewarm. To the extent that a rise in financial institution credit is a proxy for investment demand picking up, there are signs of a recovery. But leads and lags in the process foreclose an early recovery. Annual interest costs of around 26 per cent are still too high for industry to be economically viable; no attempt at industrial recovery can possibly succeed unless interest rates are brought down and availability of credit further de-choked.