February 29, 2001. Yashwant Sinha is on top of the world. The corporate sector has dubbed his essay as the budget of the decade. Fast forward to December 2001. Rollbacks are back in vogue. IMF, NCAER, CMIE and CII trim their growth projections. Even the RBI declares that GDP growth could be as low as 5 per cent. The corporate world feels it will be closer to 4.5 per cent. The dream budget has turned into a nightmare. But the Government continues to be in a state of denial. India Today looks at the myths and the realities of economic growth.

Myth: The Government and RBI say the economy will grow at between 5 and 6 per cent.
Reality: The GDP cake is made half of services and a quarter each of agriculture and industry. Last week the NCAER forecast that the growth in the three sectors would add up to a 4.83 per cent increase in the GDP. Even this seems optimistic. The debatable point is the NCAER's estimate of a 4.8 per cent growth in industrial output which grew at a miserable 2.3 per cent till September. To achieve the 4.8 per cent mark for the whole year, industrial output would have to grow at over 7.3 per cent between October and March. That is unlikely. On the current trajectory, industry would contribute 0.5 per cent to the GDP pie. As for agriculture, despite a good monsoon, growth is expected to be under 4 per cent. That would mean an addition of 1 per cent to the GDP. Even if we accept the NCAER's optimistic projection of 6 per cent growth in services-in the face of a general slowdown-the sum of the parts would be around 4.5 per cent. Some economists believe higher agricultural growth could boost industry and make this happen. But the dull Diwali contradicts this hope. In essence we could well be looking at a GDP growth of less than 4.5 per cent.

Myth: Higher agricultural output this year will trigger a revival.
Reality: True, after two years of decline, agriculture output is set to grow this year. But to put it in context, one has to factor the extent of accretion in output and its multiplier effect. According to the RBI, the net accretion to output in the kharif crop has been 2.5 million tonnes. CMIE estimates that this year the rabi output will be 104 million tonnes, or 11 million tonnes more than last year. Assuming the entire produce will be procured and at an average procurement price of Rs 500 a tonne, this translates-albeit crudely-into incremental income of around Rs 6,750 crore. In other words additional spend in the rural economy will be up by around Rs 10,000 crore even if one factors a multiplier effect. Juxtapose this with the size of the country's GDP: Rs 25 lakh crore. This means an accretion of less than 0.4 per cent. The question then is whether this is enough to trigger a revival.

Myth: CTV sales are buoyant and signal a revival in spending because of the robust agricultural growth.
Reality: During October, CTV sales went up only 6 per cent compared to last year. Indeed, between April and October 2001-2, growth has been 12.93 per cent in volume terms and 3.6 per cent in value terms compared to 12 per cent and 5.6 per cent last year. Very simply, the higher volumes have been achieved on the back of price cuts and squeezed margins. The biggest in the business are struggling to maintain both topline and bottom line growth. Besides, only CTV sales are up. Refrigerator sales are down by 2 per cent and washing machines sales by 5 per cent. Even the all-time favourite gold has seen a 17 per cent drop in sales in the first six months.

Myth: Improved corporate profitability indicates better days.
Reality: Sales are actually negative in the first half of the year compared to a 7 per cent growth last year. Even if one compares the first quarter with the second quarter, sales are up by just 1.64 per cent and net profit is up by 3.09 per cent. Interestingly, a large part of the rise in net profit is due to lowering of interest costs and higher other income (sale of investments, assets and dividend income). A recent study of 1,350 profit-making companies shows that if other income were to be excluded, 272 of these companies would be in the red. Further, a sample study of 2,198 manufacturing companies shows that net profit is down by 16 per cent compared to the corresponding quarter of the previous year. And if one removed other income, the drop in net profit would be 41.8 per cent. In the first six months of the fiscal, Crisil credit ratio for downgrades is now at 0.11- that is roughly one upgrade for 11 downgrades as against the one to one ratio in the previous fiscal. It's not surprising then that the NCAER Business Confidence Index has dropped 11 per cent from the last quarter to 82.5 points, the lowest in 24 months.

Myth: The Government's plans to spend Rs 58,000 crore over six years on roads and highways will help revive the economy.

Reality: This is only partially true. Split Rs 58,000 crore by six years, which is the tenure of the project, and it works out to about Rs 26.5 crore a day. Compared with the daily GDP (that is, Rs 25,00,000 crore divided by 365 and we have Rs 6,849 crore) the spend works out to around 0.4 per cent. Given that we are in December and some of the highway projects are yet to take off, the effect, if any, will be minimal in this fiscal. Sure, in the long run the projects will boost cement and steel sales. But is that enough to act as a catalyst? To get a perspective, consider this: current production of cement in the country is around 93 million tonnes out of an installed capacity of 119 million tonnes. The roads project will require an estimated 2.7 million tonnes of cement, or 2.4 per cent of the installed capacity. Ditto with steel. The project will enable sales of an additional 2.5 million tonnes of steel. To get an idea of how minimal this is take these statistics: China consumes 127 million tonnes of cement per annum while India consumes 23 million tonnes. Till September this year, China produced 92.4 million tonnes and India 20 million tonnes. Of course the roads project will create employment for about 40 persons per km, or 5.2 lakh persons over five years for the entire length of 13,000 km. Can that offset the lack of spend due to a million jobs lost in the past two years? The roads project does signal a pro-active regime but it isn't big enough. Compare this with the near $100 billion (Rs 4,80,000 crore) stimulus that the US pushed through in just two months or the $48 billion that China spent on infrastructure in the past two years.