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BW Businessworld

‘We Still Don’t Find Much Borrowing Taking Place’

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Production is up, but so is inflation. Businesses seem to be keen to invest again, but borrowers are not thronging the banks yet. Stockmarkets are on the rise, but foreign direct investment is harder to come by. Global economies seem to be recovering, but exports are yet to show a positive surge. Is the economy actually taking a turn? Finance Secretary Ashok Chawla certainly thinks so. He speaks to BW's Anjuli Bhargava. Excerpts:

Are there definite signs that the economy is turning?
The IIP (index of industrial production) numbers have been consistently improving, particularly the numbers that came in earlier this week. It is not just one month or the base effect. From April to August, there has been an improvement compared to the same period last year (5.5 per cent against 5.1 per cent). So it is not just a flash in the pan. Secondly, one can see a logical pattern in the revival signs. First the consumer durable segment did well, then the capital goods segment, and this month, the fastest increase has been in consumer goods. It is possible that some of this is due to the festive season, but there is no denying that things are turning. Thirdly, the international sentiment is definitely improving. Many economies now are not as bad as earlier projected. Capital flows have increased. We have seen substantial inflow of foreign institutional investment. Last year, the total inflow was around $15 billion. This year it is the same in the first six months (both are net numbers). Equity markets are turning normal, and money and credit markets are also getting more active.

What kind of GDP (gross domestic product) numbers are expected now?
We expect that we will end FY10 some-where between 6.5 and 7 per cent. So if the first quarter was 6.1 per cent, the second one should be around 6.5 per cent, if not more.

But are businesses investing again?
Even if businesses have not yet gone back to making the actual capital expenditure, they are seriously reassessing their investment plans. We still don't find much borrowing taking place. Banks have a lot of liquidity, but borrowers are still few and far between. As a result, we (government) have been able to borrow quite effortlessly. This, in fact, has helped us. We are handling our borrowing in a way that we complete it in the next two months, so that there is space for the private sector to borrow. We have already done 70 per cent of our borrowing in the first half. We are trying to get done with the rest by mid- January. The signals are that investment decisions are coming back on the front burner, but are not in implementation mode as yet.

Isn't the financial sector still struggling? Consultants say top-level hiring in this sector is not happening at all.
In India, the problems spread from the real sector to the financial sector, unlike in the West, where the problems began in the financial sector. Now that the real sector is improving, you will see the financial sector improve. Employment is picking up in the real sector (there is no data but we hear plenty of anecdotal evidence). Also, many banks and financial firms are cleaning their balance she-ets and consolidating rather than expanding, so you may not see hiring going up that much.

What about inflation?
Inflation in food items is high because there are structural problems on the supply side with certain commodities. This has been worsened by inadequate monsoon. While the decline in production is not high enough to cause a strain on the actual supply of food-grains, there are inflationary expectations. Inflation, from 1 April, is about 6 per cent. It will remain around that till end of March 2010. There are supply constraints that lead to food inflation and this is cyclical. Look at pulses. You cannot source them from overseas since very few countries consume or produce pulses like India does. We will have to live with this kind of food inflation till such structural problems on the supply side remain. For this year, it will begin to moderate once this year's rabi crop comes in and inflationary expectations are less pronounced.

Which sectors have not shown a pick-up yet?
Auto, textiles, transport, real estate — all these have shown improvement. But export sectors such as gems and jewellery have not. These are dependent on outside demand, which is yet to show signs of improvement.

Do you think real estate has actually turned the corner?
What we hear from developers is that the lower end of the market is showing signs of revival… and that they are focusing on this segment. Earlier, a lot of inventory of very high-end apartments (over Rs 1 crore) had built up. But now demand for the Rs 20-50 lakh range of houses is improving.

(This story was published in Businessworld Issue Dated 02-11-2009)