It would be naive to expect the monsoon alone to resuscitate demand

It seems strange that after all these years of industrialisation hopes of revival in the Indian economy still remain pinned on the monsoon.

But what is stranger is that this time we are not praying to the rain gods to replenish our food stocks or bring down food prices. We are praying for help to revive industrial growth.

Maybe the rain gods will indeed have mercy on us. Maybe rains will be spatially and temporally ideally distributed across the country’s agro-climatic zones. The result will be a bumper harvest — for which the country’s overflowing granaries may have no place. But we could live with that if it gives us the other outcome we are looking for — an increase in rural demand that would revive industry.

But is deficient rural demand the only or even the main problem? If the demand problem had been mainly due to crop failures, one could expect goods for which demand has declined to be largely, or exclusively, rural.

Also, since the demand shortage was from farmers in unirrigated areas, one would expect the lower end of the market to be affected most. So it is illustrative to look at the segments of industry that are suffering from deficient demand.

Companies such as HLL, Nestle, Nirma, Colgate, Dabur, SmithKline and Tata Tea show widespread slowdown in sales. In products such as milk powder, toothpaste, toothpowder, toilet soap, packaged tea, detergent cake, hair oil, chocolate and noodles, the slowdown was apparent almost throughout the year, though it sharpened significantly in the last quarter of 2000-01.

But, though sales data from companies producing branded consumer non-durables are showing a decline, consumer non-durables as a whole have not been affected by the slowdown. In the fourth quarter of 2000-01, growth in consumer non-durables that include essentials like food, clothing and footwear was 6.9 per cent over the corresponding period last year, the highest among all use-based categories of industrial products.

Further, growth in consumer durables fell sharply. From 22.7 per cent in the first quarter of 2000-01, it plunged to merely 0.9 per cent in the fourth quarter. There has been a sharp decline in the sales of products such as consumer electronics and automobiles.

The question is, how much will the monsoon be able to help? How far will increase in incomes of farmers in drought-prone areas of Gujarat, Madhya Pradesh and Rajasthan be able to revive demand in consumer durables and branded consumer products? To a very limited extent, I should imagine, however large the multiplier effects may be.

This, of course, assumes that it was the drought and the crop failure in particular in areas of Western and Central India that were responsible for the slowdown in rural demand. But that was not the only factor.

Though the drop in output growth was clearly a crucial factor that led to the decline in incomes, of equal importance was the low growth in prices of agricultural commodities. The supply situation was comfortable, thanks to two successful years of record output.

Cereals witnessed a fall in prices and edible oil prices remained low despite poor output as supplies were supplemented by imports. As a result, as terms of trade moved unfavourably against agriculture, income of farmers did not rise proportionately even in areas where the crop was good.

Since industry wants demand to rise, not only should output rise, farm prices should not fall with the resulting increase in supply. Unless output prices rise at least in line with input prices, it will not help push incomes very far. Unless the positive output effect outweighs the negative terms of trade effect, incomes will not rise. Therefore, the mercy of the rain god may not be sufficient.

Left to the market, of course, it is impossible that the outcome of a higher supply will be higher prices. If trends observed last year continue, the increase in income will be limited and the monsoon may not bring the bounty that it is being expected to.

Further, it is important to note that the sectors most hit by the slack demand were those related to investment activity. For instance, in the last quarter of 2000-01, capital goods production was down by 3 per cent. Basic goods production had fallen by 0.1 per cent. Low demand for investment is seen from the fact that capital goods imports had declined by 6.5 per cent during April-January 2000-01 compared to the same period last year.

The financing of investment reveals the same trends. Disbursement by financial institutions was lower at 12 per cent in April-January 2000-01 compared to nearly 20 per cent in 1999-00. Funds raised through debt and equity had plunged by over 16 per cent debt and 25 per cent respectively. Public investment grew at a much lower rate of 30.7 per cent in nominal terms in 2000-01 compared to 40.6 per cent in 1999-00.

In other words, investment demand, both of the government and of the private sector, had declined. And, as investment-related production — capital and basic goods — comprise half of industrial output, industrial growth was hit sharply.

Investment demand has been low throughout the year and only a portion of it could be due to the slowdown in consumer demand caused by the bad crop. Whether industry is succumbing to competitive pressure for which it is not adequately prepared, or whether it is the structural impediments of poor infrastructure, bureaucratic hassles and so on, there do not seem to be adequate profitable investment opportunities that are attracting investors.

The low growth in prices of manufactured goods and prospects of even lower prices with the removal of QRs no longer allow producers to be price setters, leading to a squeeze in profit margins in many industries. The lower margins might not be tempting enough for potential investors. Moreover, it is difficult to believe that investment decisions that are usually taken with a much longer time-horizon depend very much on short-term fluctuations in crop output.

Two inferences emerge. One, while the monsoon may bring higher agricultural production, unless prices move favourably, farm incomes are unlikely to rise and give industry the push it is hoping for. Two, even if consumer demand grows in the coming months, unless investment demand picks up, industrial revival will remain uncertain.

So, though hopes remained pinned on the monsoon, and one prays for good rains, it might improve demand and sentiment for at best a couple of quarters. To believe that it will solve long-term problems relating to income and investment that are related to government policies is naïve.

The government on its part needs to address long-term concerns about agricultural pricing and procurement policies on the one hand and the degree and duration of protection provided to industry on the other. Unless these issues are addressed, all that good rains can do is to help the finance minister pump-prime the economy.