Dented, Not Punctured

In a week when officialdom has "celebrated" for the second time the claim that India's population has reached the billion mark (an earlier celebration took place a year or so ago), the shakiness of any statistics on India needs no under-lining. So, far more than the government's numbers on the economy, the reliable barometer on business has been provided by strictly non-official surveys. The National Council of Applied Economic Research (NCAER), for instance, has been doing quarterly surveys of business opinion, and these have reflected very accurately the mood in industry and trade. The latest such survey says that business confidence has finally climbed back up to the level that prevailed in late 1995 -- when (it will be recalled) a sharp increase in interest rates signalled the start of India's longest business "recession". In a sense, therefore, a watershed has been reached.

 

This comes as no surprise; it is what should have been expected at a time when the share market was going through the roof. But now that the market is back very quickly in the dumps, and the talk suddenly is of another bear phase, the answer everyone seeks is whether the optimism reported by the NCAER reflects primarily the brief period of sunshine on the bourse, or is a pointer to a more lasting upturn. Certainly, the corporate results that have been streaming out over the past month or so suggest that the larger companies have begun to do significantly better, in both sales, profits and profitability, across a fairly broad spectrum of industries. Export growth is back into double-digit numbers (in dollar terms), and consumer confidence seems high. Also, the governments at the Centre and in the states are running massive deficits, of which a good bit will probably be monetised -- thereby pump-priming the system and boosting growth. All this points to a qualitatively better business environment this year.

It is a bit of a surprise, then, to find that investors don't share this confidence. Of the 140 "Group A" scrips that were traded one day last week, only 40 had a price-earnings ratio that crossed the respectability bench-mark of 20; all 40 fell into one or other of three categories: infotech, pharmaceuticals and fast-moving consumer goods (FMCG). Something like half of the remaining 100 scrips had a P:E ratio of less than 10. There was even worse news in the "B1" scrips: something like 80 per cent of them had a P:E ratio of less than 10. And, as was only to be expected, the position was even bleaker in the "B2" scrips and of course the infamous "Z" category. Clearly, confidence is low when it comes to the overwhelming majority of the listed companies (raising the question, once again, as to whether listing is far too easy in India). If investors are willing to put any real value on a company, they seem to be saying that it is a necessary pre-condition that it has to be in one of just three sectors.

Since Indian industry has a much broader base than just these fancied sectors, this suggests a continuing problem with the "old economy" companies, including those in commodity sectors (like steel and aluminium) which have seen an upswing in prices. Many of these sectors (as well as engineering) are also heavily influenced by the investment tempo in the system, and there is no sign yet that this tempo is about to pick up. This should point to a weak economic recovery this year. Viewed from this perspective, the NCAER survey is in fact surprisingly optimistic. But perhaps the bourses are over-correcting after an irrational burst of exhuberance, driven as they are by a series of external factors that don't have an immediate impact on business (like the fate of scrips on Nasdaq and the intentions of the US Federal Reserve Board chairman). The more important issue for Indian business is the likelihood of a sub-normal monsoon, and the impact this might have on rural demand. On balance, the stock market today seems more pessimistic than it needs to be. Business confidence will certainly be dented by the crash on the markets, but a dent is not a puncture.