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Business Commentary/ S H Venkataramani

It is too early for champagne!

Are the clouds of recession beginning to lift from the Indian economy?

A few straws in the wind certainly seem to indicate, on the face of it, that the pall of recessionary gloom may have finally begun to lift its depressing veil.

Figures released by the Central Statistical Organisation indicate that the index of industrial production spurted up by 6.8 per cent in April, when compared to the growth of 4.8 per cent clocked during the same period last year. CSO statistics normally involve a time lag of three months to garner, collate and put out. Industrial growth had trotted up by a meagre 2.5 per cent in March. The upsurge in the manufacturing sector has been more pronounced. Growth in the manufacturing sector touched 7.8 per cent in April against 4.9 per cent in April 1998.

The Sensex has been, by and large, bullish. Of course, there are the regular ups and downs. But the overall outlook is that the stock markets are beginning to take off, barring the last millennial bugs. During May, the Sensex recorded its highest gain in the last five years, spiralling up by 655 points and effectively gaining 20 per cent in just the space of five trading days.

Purchases by foreign institutional investors in Indian bourses, in equity and debt, have touched a record $ 750 million from the beginning of this year. The total tally of FII purchases from the beginning of 1993 has now almost touched the magical figure of $ 10 billion US. The Government of India and several economic pundits alike have been talking about the need for the country to attract this volume of foreign investment annually. But this is the first time that we have been able to, at least cumulatively, come close to this figure.

The Confederation of Indian Industry's Business Outlook survey finds captains of industry much more optimistic today about the prospects of economic recovery, when compared to the overwhelming feeling of despondency that prevailed among them six months ago. A similar survey undertaken by the Federation of Indian Chambers of Commerce and Industry voices the definite hope of industry chieftains that the economic slowdown will get reversed before the end of the current financial year.

But the fine print of the economic writing on the Indian wall presents a gloomier picture. The problems of economic slowdown and recession are not about lack of production but about lack of demand. It is this lack of demand that leads to a decline in the sales of finished goods and services. This in turn leads to a slackening of the demand for intermediate goods. It is reduction in demand which ultimately leads to the curtailment of production.

Therefore the cutting down of production is merely a symptom of the overall economic malaise. The underlying disease is the tapering demand. So if surveys have to conclusively establish that there is definite evidence of a picking up of the economy, what they will have to necessarily show is improvement in sales rather than merely an improvement in production. But actual sales is very difficult to monitor, chart and map the course of.

True enough, business enterprises of all hues and colours, from public and private limited companies to partnerships and proprietary concerns, collect and furnish sales figures for every three months, every six months and every full year. Therefore, theoretically speaking, it should not be difficult to compile sales figures for both the corporate and unincorporated sectors of Indian industry as a whole. But the rub is that the sales figure of any Indian company need not and do not reflect actual sales.

If the turnover figure of an enterprise has to reflect actual sales, then it must not be based just on the goods and services of the firm that have been indented. The order book cannot fully indicate sales. To be able to see what is the volume of goods and services that have been actually sold, you need the position of outstanding payments. You need to tot up the total receivables of the firm.

If a company, for instance, allows an usual credit period of 90 days to its dealers and distributors, then to get the volume of actual sales, you should deduct all payments that are due for more than three months. Whenever there are forced sales, when a business outfit tries to actually thrust its goods down the unwilling gullet of the market, then the extra elbow room of an additional credit period is normally extended by the marketing managers. An adjustment needs to be made for the artificial inflation of such forced sales when you try to reckon actual sales. In practice this is extremely difficult.

There is another gimmick that is also customarily resorted to by marketing professionals to show higher than real sales volumes. This is to increase the margin of unsold goods that are accepted back by the company. If a company will normally be willing to take back five per cent of the goods it supplies to a dealer as legitimately unsold, it may take back 10 to 15 per cent when there is a special marketing promotion effort or a new product launch. When we try to reckon actual sales, we must also discount the artificial cushioning of the acceptable rate of return of unsold items.

Finally, we also need to excise out the buffer of other income from sales figures. The exception often proves the rule in science and in real life. Similarly in India Inc, exceptional income often largely outweighs actual sales income. This exceptional income normally derives from the sale of assets, the licensing out of brand names and other intangible assets of a firm, and similar other innovative stratagems which are outside the pale of normal business activity.

If you scan a survey done by Probity Research, other income of Rs 20 billion pepped up the sales turnover of 500 Indian companies during the financial year that ended on March 31, 1998, pushing it up to Rs 800 billion. In other words, the other income constituted 2.5 per cent of the sales turnover of these companies on an average.

The same 500 companies puffed up their sales turnover during the financial year that ended on March 31, 1999 by an other income of Rs 30 billion. The combined sales that these companies totted up was Rs 900 billion. The share of other income in turnover therefore actually increased to three per cent, to shore up the bottomline against the crunch of recession.

It is therefore still too early to uncork the bottle of champagne and say cheers for the revival of the Indian economy.

S H Venkataramani worked with India Today and The Pioneer before turning freelance.

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