BANGALORE: A recovery in the economy could be expected only
beyond 2002, or that is what the Indian industry bigwigs felt while responding
to a snap poll conducted by the Confederation of Indian Industries at its
National Council and Associations Council meeting recently.
In a similar poll in July, majority from the industry said
the economy was expected to recover within a year’s time. Attributing the
"US effect" as a factor in this change in perception, it has become
clear that an economic impact is near certain. However, opinion is divided about
its magnitude. One lobby foresees a significant impact and there are others who
believe it would be moderate.
Responses were sought on three basic factors: foreign direct
investment, foreign institutional investments and trade to measure the impact on
the Indian economy.
A significant impact on FII inflows is expected because of
the actual trends witnessed in the aftermath of the attacks on the US. FIIs have
been net sellers in equity almost every day since the attacks (US $77.5
million), except for a few days which witnessed marginal net buying activity.
The recent announcement of a hike in FII limits has not been reflected in daily
trading yet.
A moderate impact on trade was also felt, on the anticipation
that sanctions against India would be lifted. The poll was conducted before the
formal lifting of the sanction, but it did perhaps influence expectations of a
pick up in trade in sectors affected by sanctions.
The concern area is perhaps the significant impact on FDI
inflows. With the quantum of FDI flows decreasing due to the global economic
slowdown, any impact on inflows from the biggest investment partner would
substantially affect India. The industry felt the infrastructure sectors would
have to bear the brunt of a decline in FDI inflows. Garments, gems, consumer
goods and engineering goods were some of the export-oriented products to be
negatively impacted. Software, aviation and tourism sectors were unanimously
chosen as sectors to be most affected.
However, the magnitude of the impact on the economy was
expected to be far greater because the Indian market has been sustaining growth
in the services sectors over the past five years.
The CEOs endorsed a complete focus on the implementation of
infrastructure projects as the best short-term route towards economic growth,
though reduction in interest rates and disinvestment as other desirable measures
were not ruled out. But secondary stock market revival did not really rank too
high as a short-term measure to revive growth.
An interesting response relating to the stock markets was on
the reasons for the lack of liquidity in the secondary markets. Given a choice
in terms of reduction in bank finance, ban on badla and a general lack of
investor confidence, the respondents almost unanimously chose the latter. Ban on
badla was the second and reduction in bank finance the third choice for the
respondents to the snap poll. The need to reintroduce badla to infuse liquidity
in the secondary market for stocks was emphasised by most of the respondents to
the poll.
Meanwhile, the CEOs felt that post monsoon demand especially
in the rural areas is certain to increase. They however, were conservative in
their growth projections during the second half of the current financial year.
Most of the respondents expect a less than 10 per cent growth in sales and
profits over the next six months.