Is 'India Shining' or is it mere hyperbole?

The Highlights

GDP growth is estimated at a stunning 8 percent-plus.

Foreign exchange reserves are at over $103 billion.

The stockmarket is going through the roof.

Check out the mushrooming malls, improving telecom connectivity, booming industry.

A great monsoon last year has heralded greater growth.

The government has ambitious plans to link rivers, to build superhighways -- both concrete and wireless, criss-crossing the nation.

A South Asia Free Trade Agreement has been created.

Plus radical economic and strategic pacts with the United States, the European Union, and Southeast Asia.

There is no better time to be an Indian, declares Prime Minister Atal Bihari Vajpayee.

The nationwide media blitz -- India Shining -- would have us believe that we are now looking at a resurgent India, an economic and military powerhouse striding firmly towards its rightful place in the world.

But there are many who disagree.

Global corporations cite corruption, red tape, high inflation, poor laws and an infirm infrastructure as reasons for their not wishing to invest in India.

Opposition parties call it a pre-election gimmick.

Economists say many million Indians still do not have access to potable water, electricity, decent housing or even good roads.

And literacy rates are appalling.

Foreign policy pundits compare India unfavourably with China's phenomenal rate of growth and environmentalists point to the growing ecological ravages due to unchecked industrial growth.

Is India really shining?

Top corporates like Sundaram Fastners, Bharat Forge, Ranbaxy and Reliance have acquired companies in the difficult markets of Europe and UK. Some, like Bharat Forge, Jindal Stainless and Apollo Tyres, have also made aggressive forays in the competitive Chinese market. Besides, there have been some new joint ventures like the Apollo-Michelin one. These apart, the corporate world has seen a tremendous amount of consolidation.

However, beyond the visible changes, crucial questions still remain. How many companies have made greenfield investments, how many of them have expanded capacities and how many have made real diversifications? A recent study on corporate investment intentions, published in the December 2003 monthly bulletin of the Reserve Bank of India, talks about inadequate greenfield investments in Indian industry. The study reveals a fall of 23.6 per cent in capital expenditure in corporate investment in 2001-02, followed by another 9.1 per cent fall in the year 2002-03. The study also warns that if the trend continues there could be a further fall in corporate investment in the coming year.

The report suggests that although the climate for fixed capital investments appear to be conducive and business confidence is high the current year may witness a fall in corporate investment compared to that in 2002-03. But what is India Inc's reaction to this?

Sectoral Watch

Take the example of the cement industry, which is not positioning any major fresh investments. On the other hand, there are moves for acquisitions in this sector, which could trigger off even more consolidation.

Many companies including ACC, Gujarat Ambuja and Grasim are lying low. After a double-digit growth of 11 per cent in calendar year 2002, the growth story suddenly went awry and the industry has ended 2003 at 115 million tonne, which works out to a meagre 6 per cent growth in demand. The industry's take on investments is very clear. Looking at the demand situation, the industry would rather consolidate.

"It's time to consolidate at ACC. There are no new reasons for any fresh investment," says ACC executive director, AK Jain. For Grasim, the coming year would be one of consolidation and cementing its leadership position.

Ambuja Cement grew at around 12 per cent in 2003 as against the industry's 6 per cent. "We expect to continue to grow at a rate faster than the industry in the years to come," says Gujarat Ambuja executive director, Anil Singhvi. The industry expects the government to expedite work on highways, power generation and distribution segment. According to Mr A V Dharmakrishnan, senior vice-president, (finance), Madras

Cements, the cement industry in south India is currently operating at 60 to 70 per cent capacity utilisation and hence capacity expansions are some time away.

In the automobile sector, again, the industry would rather wait and watch. At Sundaram Fastners Ltd (SFL), despite the fact that capacity utilisation is high and there is no waiting period, SFL has no plans on the anvil for a major capacity expansion. Capacity addition has been a continuous process with the organisation, and undertaken frequently, depending on the need. "Even if there is a bust in the industry, I am sure it will not be as bad as it was before. It will only set a new benchmark for the fall of the industry", says Mr VG Jaganathan, President, Finance, SFL.

However, Rane Brake Linings (RBL), which boasts of full capacity utilisation, is planning to go for a small capacity addition in its Pondicherry plant. "Though there was remarkable growth in the industry last year, we will not have any major capacity addition in the immediate future as we would like to wait and watch the proceedings at least for the next one year", said Mr S Sundar Ram, President, RBL. IP Rings, a part of the Amalgamations Group, one the other hand, is riding high on this boom and is contemplating exports to the Middle East and South Africa, which may need expansion. It has also received enquiries from the US. "We are looking at volume exports and will be expanding our capacity in fiscal 2004-05 to meet demands" says Mr KV Shetty, Managing Director, IP Rings Ltd.

Hyundai Motor India, the second largest passenger car manufacturer in India, is, however, on an expansion drive, being driven by the demand it is expecting, especially from the overseas market. Works for capacity addition are underway to meet the growing demands, both in the domestic and export markets. With the $220 million capacity addition HMIL expects exports to jump to 2,50,000 units in the near future, as against the current 1,68,000. At a press meet held for the roll-out of the fifth lakh passenger car from its Chennai plant, Mr BVR Subbu, President, HMIL said: "It took us five years to reach the half million mark. Now we are sure of reaching the second half million within three years, by 2006."

The steel sector also is making cautious moves. Says Jindal Iron and Steel Company Ltd (Jisco) joint managing director and chief executive officer, Raman Madhok: "Many larger companies are not really making any fresh investments now as in the past, much of the loans taken are still being paid off. Now, instead of greenfield projects, most companies, like in the steel sector, are opting for measures like debottlenecking and brownfield projects which are improving productivity and efficiency levels," he adds.

Mukand Ltd managing director, Niraj Bajaj agrees and says that after five bad years the industry faced, doing well for the past year or so is only relative. Steel companies have learnt a hard lesson and are now being more cautious and careful. "The sector will only make fresh investments if there are signs of sustained demand. Financial institutions are being more careful in lending," he adds.

On the exports front, M Rafeeque Ahmed President, Federation of Indian Export Organisations (FIEO) says: "With projected growth of 8 per cent in agriculture, and 6 per cent in industry coupled with reasonably good performance by the service sector, the GDP is likely to grow by 7 per cent during 2003-04 as compared to 4.4 per cent during 2002-03." He elaborates that going by this logic the export sector should have grown with some expansions, but the strengthening of the rupee is impacting adversely on the competitiveness of their exports. "Appreciation of the rupee by about 5 per cent in dollar terms since the beginning of the calendar year has certainly affected the competitiveness of our exports as can be seen from the decline, or spreading-out of orders. Indian exporters have just not been able to meet major orders from Wal-Mart."

What's The Outlook?

Nevertheless, despite the recent trends on the investment front in many sectors, some individual companies have taken a more positive outlook. For example, Raymonds Ltd last week announced investments to the tune of Rs 200 crore in setting up new plants in Bangalore. This would include a jeans manufacturing facility and a greenfield project for manufactur- ing suits and trousers in Bangalore. Raymond Ltd chairman and managing director, Gautam Singhania, said that this would give the company an opportunity to move up the value chain. He added that more and more people were shifting to readymade garments and hence it was an opportune time to invest in these facilities. The company also hopes to convert about 30 per cent of its exports into garments post-2005.

Similarly, Aptech is expanding both nationally as well as internationally. We are investing Rs 25 crore to set up an university in Raipur this year and setting up colleges in Chennai, Baroda and Mumbai." Says Aptech Ltd CEO and managing director, Pramod Kheda: "There is a mixed scenario as far as investments are concerned. Investments are made both domestically as well as abroad. Outsourcing is a major driver which is not limited to knowledge driven services. Manufacturing (auto sector) is also taking a lead."

Delhi-based Flex Industries Ltd too is close to investing Rs 200 crore in expansion and modernisation of its manufacturing facilities in Noida. More recently, the company invested Rs 90 crore to install a new BOPP film production facility. Says R K Jain, president, (finance), Flex Industries Ltd: "We plan to invest Rs 100 crore every year for the next 3-4 years in a row. This will mainly come from internal accruals. We also plan to retire high cost debt since we already have an equity holding of Rs 50 crore."

There are still some who believe that investment are happening across regions According to Godrej Consumer Products president & executive director Hoshedar Press one can see a lot of investments being made across sectors in places like Kutch, Himachal Pradesh, Uttranchal and Assam. Hence, the writing on the wall is clear. While companies know that expansion and investment help growth, they are also cautious, especially after burning their fingers in the recent past, sometimes due to overproduction and sometimes due to sectoral recessions. Many lost out on imminent orders from overseas. The uncertainties in the economy has also played a trick. As Federation of Indian Chambers of Commerce & Industry (Ficci) president YK Modi puts it: "The Indian economy is undergoing a major transformation. Indian entrepreneurs are aware that soon the 20 per cent duty will come to the zero level. To remain competitive, one has to constantly invest - both domestically as well as globally. Though investments are being made, the domestic investment environment will not be attractive unless labour laws are changed." Most feel that acquisitions, mergers, cost cuttings etc are other stable routes companies can follow to grow. As Jisco's Mr Madhok says, these days brownfield projects are a cheaper option than investing in greenfield projects. The idea behind this, he feels, is due to the fact that such options add value to the various players, besides improving their margins, which is a good thing for any sector.

As Mr Niraj Bajaj of Mukand sums up: "Most steel companies now prefer to be zero debt rather than go the equity way to raise funds. Therefore, nowadays the sector is seen to be moving towards methods like debottlenecking and maximising existing capacities rather than investing afresh." The message from the industry: There is still lots the government and policy-makers can do to help companies boost their bottomlines.