Bleak Present, Bright Future?

that the output of the capital goods sector is capital investment, what the steep drop suggests is a decline in investment itself (unless it can be established that imports are taking up the slack, but this is not true either). Thus even the inconsequential growth in industry is not investment-based but consumption-driven. Note that forward linkages are the lowest for consumer goods.

These indicators of industrial performance are matched by the financial performance of companies. The results trickling in now from the corporate sector are quite depressing. It comes out very starkly that profits or profitability are down all round. In most cases this is under pressure of rising costs, the most prominent of these being the increase in interest costs. A contributory factor has been the pay-out due to the minimum alternate tax. To a certain extent, the low rate of profits could have been compensated by a greater volume of profits if aggregate demand in the system had been buoyant. But this has been at a low ebb for a wide variety of reasons. One of these, which has not been often recognised, is the continuing fiscal contraction by the government. As a result, the demand induced by government expenditure has fallen.

 

In the face of all this, why would business sentiment (as revealed in the CII survey) be upbeat? Sentiment is not based on data, and could have been influenced by the Budget, the fiscal giveaways, the avoidance of immediate elections and a variety of other factors. And this may be what the CII forecast is all about. The Budget in its own way is expansionary and does address most of the problems raised by the industry. The credit policy also has done its bit. So tax rates have been brought down substantially, interest rates have come down by 3 to 4 per cent from what they were six months ago, liquidity is not as tight as it was and the restrictions on working capital finance have been eased. It is not surprising then that the pervasive despondency of December-January has given way to the hope that better times may be round the corner. And that is what confidence is all about.