Industrial Growth in India: Where are we heading? The latest data for Index of Industrial Production (IIP) has been released for the month of October 2008. It shows that industrial growth in India has turned negative for the first time since 1993. According to figures of IIP, the overall growth rate of industrial production as measured by the IIP has been -0.4% in the month of October 2008 as compared with that of October 2007.
The detailed data for the IIP is given in the following table: Growth Growt h Rat Rate e of Ind Indust ustria riall Pro Produc ductio tion n ove over r the cor corres respon pondin ding g per period iod of th the e previous year Month
Mining
2007-08
Manufacturing
2008-09
2007-08
2008-09
Electricity
2007-08
General
2008-09
2007-08
200809
October
5.1
2.8
13.8
-1.2
4.2
4.4
12.2
-0.4
Apr-Oct
4.9
3.7
10.6
4.2
7.2
2.8
9.9
4.1
Source: Press Note -: Quick Estimates of Index of Industrial Production and Use-based Index (Base 199394=100) for the month of October, 2008. Available at: http://pib.nic.in/release/release.asp?relid=45554
From the above table it is seen that the growth rate of the overall index declined from a high va high valu lue e of 12. 12.2% 2% in Oc Octo tobe berr 20 2007 07 to a ne nega gati tive ve -0 -0.4 .4% % in Oc Octo tober ber 2008. 2008. If we compare the growth rates of April-October 2007 and that of 2008 we see that the growth rate declined from 9.9% in 2007 to 4.1% in 2008. In September 2008, this growth rate was 4.8 4.8%. %. (So (Sourc urce: e: http://mospi.nic.in/mospi_iip.htm http://mospi.nic.in/mospi_iip.htm). ). Th This is ma mass ssiv ive e dec decli line ne in th the e growth rate of the overall industrial index is driven mainly by a drastic fall in the growth rate of the manufacturing sector. It is seen from the above table that the growth rate of Manufacturing registered the maximum maxi mum fall, whereby it declined from 13.8% in Octob October er 2007 to a negat negative ive -1.2% in October 2008. On the other hand, the growth rate of manufacturing declined to 4.1% in April-October 2008 as compared to 9.9% in the same period in the previous year. The growth rate of manufacturing in September 2008 was 4.8%. (Source: http://mospi.nic.in/mospi_iip.htm). http://mospi.nic.in/mospi_iip.htm ). Ma Man nuf ufa act ctur urin ing g sec ecto tor’ r’s s we weig igh ht in the ov over eral alll industrial index is close to 80%. There fore, it is obvious that such large fall in the growth rate of the manufacturing sector has resulted in a negative growth rate for the overall IIP. As far as mining is concerned, it is seen that the growth rate declined from 5.1% to 2.8%, while there has been a minor increase in the growth rate of electricity production from 4.2% to 4.4%. Let us also look into the growth rate of the 6 core infrastructure companies, whose figures have also been released. This is shown in the following table:
Index of six core sector industries - October 2008 Weight (%) in IIP
Sector
Oct ’07 % growth
Oct ’08 % growth
Apr-Oct ’07-’08 % growth
Apr-Oct ’08-’09 % growth
Crude Petroleum
4.17
-0.1
-0.3
0 .6
-0.7
Refinery Products
2.00
2.7
5
8.8
4.5
Coal
3.22
8.9
10.9
3.7
8.4
10.17
4.2
4.4
7.1
2.8
Cement
1.99
7.5
6.2
8.5
6.0
Finished Steel (carbon)
5.13
5.2
-0.5
7.3
4.2
Overall
26.7
4.6
3.4
6 .6
3.9
Electricity
Source:
Infra Growth Dips to 3.4% in October, Business Standard, 12 December 2008
From the above figure From figure it is clear that the overall overall growth rate of the infrastr infrastruct ucture ure industries declined from 4.6% in October 2007 to 3.4% in October 2008. There was a massive decline in the growth rate of steel pro duction from 5.2% to a negative growth of -0.5%. It is seen that the growth rate of cement production also declined from 7.5% to 6.2% in the same period. The ab The abov ove e tw two o ta tabl bles es sh show ow th that at th there ere ha has s be been en ve very ry si sign gnif ific ican antt sl slow owdow down n in th the e industrial sector growth rate in India, which is almost spread across the board. In order to understand the nature of this decline in the growth rate of industrial production, let us first fir st loo look k at the Use-Base Use-Based d ca catego tegoriz rizati ation on of the IIP fig figures ures.. Thi This s is sho shown wn in the following table:
Source: Press Note -: Quick Estimates of Index of Industrial Production and Use-based Inde In dex x (Ba Bas se 19 199 93-94 3-94= =10 100) 0) fo forr the mon onth th of Oc Octo tobe ber, r, 20 2008 08.. Av Avai aila labl ble e at: http://pib.nic.in/release/release.asp?relid=45554
From above table it is seen that all categories of industries witnessed decline in their growth grow th rat rates es in Oct Octobe oberr 2008 as com compar pared ed to Oct Octobe oberr 200 2007. 7. The most not notewor eworthy thy aspect is the fact that there has been a drastic decline in the growth rate of capital goods industries, which declined from a very high figure of 20.9% in October 2007 to a low figure of 3.1% in October 2008. if we consider the intermediate industries, then also a similar picture picture emerges, where the growth rate declined from 13.9% ion October 2007 to a negative growth rate of -3.7% in October 2008. Similar is the story of the consumer goods industries, where the growth rate declined from 13.7% in October 2007 to -2.3% in October 2008. Within the consumer goods sector, the growth rates of both consumer durables as well as non-durables turned negative in October 2008, while both these growth rates were quite high in October 2007 . The question is what explains explains this overall overall slow down in the growth rate of industrial industrial production in India. Firstly, it must be remembered that the Indian economy has been adversely affected by the global financial crisis. It has been the case that as a result of the global economic crisis, there has been a crisis of credit even in the Indian economy. As a re resu sult lt,, ba bank nks s ha have ve bec becom ome e mo more re st stri ring ngen entt in gi givi ving ng lo loan ans s to in indi divi vidu dual als s or companies to meet their consumption or investment needs. This has adversely affected the investment decisions of firms and companies. As a result we are witnessing that the growth rate of production of capital goods industry has declined sharply in the country. Capital goods production essentially depends on the investment decisions of firms. In a situation situ ation where the overal overalll econom economic ic scene is posit positive,f ive,firms irms increase their inves investment tments s which get reflected in an increase in the production of capital goods. By the same logic, a sharp decline in the production of capital goods essentially shows that firms are less than forthcoming in taking up new investments. Why have firms become reluctant in taking investment decisions? One reason for firms’ reluctance to make investments has been already mentioned in the previous paragraph which is in terms of higher interest rates on loans. There is however an additional reason for this reluctance, which is the following. Investment decisions of firms are based upon expe ex pect ctat atio ions ns of th the e fu futu ture re wh whic ich h in tu turn rn is fo form rmed ed on th the e ba basi sis s of th the e de dema mand nd
performance at the present. If at present, there is a drop in demand, then for the firms this will manifest itself as an increase in their unutilized capacity and/or a build up of their inventories.In inventories.In this case, the firms perceive that their earlier investment investment decis decisions ions were overestimates, since there exist unutilized capacities and therefore they cut back on inv invest estmen mentt dec decisi isions ons.. To som some e ext extent ent thi this s is cur curren rently tly hap happeni pening ng in the Ind India ian n economy. econom y. We have seen how big firms like TATA Motors or Ashok Leyland Leyland closed down their units for some days or JSW steel cutting production and so on and so forth. This is nothing but a manifestation of a demand problem, which is reflected in the fact that the growth rate of the consumer goods sector has turned negative in October 2008 from a very high level in October 2007 as has been shown in the above table. Now, th Now, the e qu ques esti tion on is wh what at acco accoun unts ts fo forr the the fa fall ll in th the e de dema mand nd in th the e In Indi dian an economy,which is reflected in the drastic fall in the growth rate of consumer goods. It must first be noted that the demand in the Indian economy which has led the good growth performance performance of the last few years is very narrowly based. It stems mainly from the demand of the rich and the middle class based upon easy loans made available to them by banks. Now, with the global financial crisis hitting India, the banks stopped giving easy loans which has resulted in the decline in demand for consumer goods, partic par ticula ularly rly con consum sumer er dur durabl ables es in Ind India. ia. At the sam same e tim time, e, wit with h mas massiv sive e pov povert erty y existi exi sting, ng, par partic ticula ularly rly in the Ind Indian ian cou countr ntrysi yside, de, the there re is ver very y lit little tle dem demand and tha thatt thi this s segment of the population generates. Therefore, what is needed is a plan of action which tries to put more purchasing power in the hands of the poor, whose demand can then increase the overall demand base in the economy and lead India towards a sustained demand led growth. On th the e ot othe herr ha hand nd it ha has s al also so be been en th the e ca case se th that at in th the e fa fact ct of gl glob obal al re rece cess ssio ion, n, particularly in the USA, India’s exports have also been badly hit. In fact the export growth in October 2008 has been negative, the lowest in many years. So, the external demand for Indian industrial output has also not been strong enough. It can however be argued that since the demand in India was largely based on the consumption of the rich and middle class on the basis of soft loans, what is essential is interest cuts, which will then automatically increase the demand in the economy. This however is not necessarily the case. The present crisis is a crisis of confidence, where even with low interest rates, banks might just refuse to lend to any borrowers other than the truly credit worthy one. On the other hand, given the uncertainties in the market, the borrowers are also less than willing to take such loans. In other words, only an injection of liquidity in the market may not solve the problem, since people may just hold on to the excess liquidity without creating any demand, a case which Keynes called the liquidity trap. The current world as well as the Indian economic situation is akin to this phenomenon. (See, ‘In Search of a real Stimulus’, Jayati Ghosh, http://macroscan.com/cur/dec08/cur11122008Stimulus.htm). http://macroscan.com/cur/dec08/cur11122008Stimulus.htm ). Another argument can be made at this point which is the following. Even if it is granted that by a mere reduction of interest rates will not solve the problem,the current stimulus package announced by the Government will take care of the problem which talks about an additional fiscal stimulus and also tax cuts in the form of a cut in excise duties. Firstly, it needs to be pointed out that the fiscal expenditure of Rs 20,000 crores planned by the Government is only 0.5% of the IndianGDP and is grossly inadequate to quell the crisis. Secondly, the tax cuts in terms of cuts in excise duties will increase demand only
if they are pass passed ed on to the cons consumers umers through a price cut. More impor importantl tantly, y, however such cuts in the excise duties is aimed at only a short term solution of giving rise to a demand bubble based on lower prices. But it completely ignores the aspect of increasing the purchasing power of the poor by direct intervention of the state in funding the Public Distri Dis tribut bution ion Sys System tem,, expe expendi nditur ture e in rur rural al are areas as etc etc.. In sho short rt the cur curren rentt sti stimul mulus us package is inadequate to meet the serious problem that the economy is in right now.
