The Indian economy has begun to feel the pinch of global problems, cost escalation and harsh monetary policy. Industrial activity has come under pressure, the signs of which are visible in its sagging growth rate. The index of industrial production grew by 5.4% in June this year, compared with 8.9% last year. The IIP for the first quarter (April-June) of the current fiscal also slipped to 5.2%, compared with 10.3% in same period of 2007-08.
Going by the latest monthly industrial production growth figures for 41 economies, India stood at 16 th with 3.8%, while China (16%), Thailand (11.2%), Brazil (6.6%) and Taiwan (5.1%) were well above in the rankings. In its recent report, the Economic Advisory Committee to the Prime Minister has forecasted 7.5% growth for industry in the current financial year, down by 1% since last year. Slower consumer demand growth and weaker expansion of export demand are the prime reasons cited for the lower growth.
A survey by Assocham Business Barometer has found that industry leaders fear that economic growth may moderate in view of rising prices of fuel and manufactured goods, reduced consumer demand, the global economic slowdown and negative sentiments in the stock markets. A growth rate of 7.2% was expected for the industrial sector in 2008-09. Even the Reserve Bank of India (RBI) acknowledged the slowdown in industrial activity in its first quarter review of annual monetary policy.
Despite the gloomy outlook, scope for improvement in the situation should not be ruled out. The moving average of monthly growth in industry and the manufacturing sector has shown that the growth rate peaked in January 2007, after which factors such as higher interest costs, larger input costs and slackening demand pushed growth down to its lowest in March 2008. Still, there were signs of a pick-up in growth in frequent intervals. So, it may take some time for industrial growth to regain double-digit growth levels, yet the possibility of a further dip is bleak.
A review of first-quarter corporate results also presents a similar picture. Sales grew in the range of 30-35%, which is a very good pace. However, profit growth was the slowest in the past 11 quarters. High input costs on account of a surge in commodity prices, rising fuel costs, higher wages and forex hedging losses were some of the key reasons for this. The sectors primarily going through a difficult situation are cement, auto, aviation, oil marketing, textiles, real estate and IT. Nevertheless, there is a silver lining for industry as a whole, seeing that sectors like telecom, capital goods, pharma, steel, retailing, FMCG and engineering will help prevent a further plunge in industrial growth.
RBI has stated in its latest monthly report that downside risks arise from the likely impact of high and rising international oil prices, increasing cost of external capital, hardening of interest rates abroad and input and wage cost pressures in some of the industries.
Huge real estate costs due to obsolete land development acts, stringent labour laws, inadequate power supply, infrastructure and logistics disadvantages are some of the key hurdles to industrial growth. Education, training, research and innovation are certainly other significant areas that need to fall into place to ensure uninterrupted industrial growth.
The government has initiated much-needed reform, beginning with the financial sector. Their continuation would unquestionably bring positive results for the economy. Also, a large number of infrastructure projects relating to roadways, highways, airport modernisation, railway expansion, port upgrade and power plants are underway. While on one hand they boost demand for construction, steel and cement, their successful completion can become the supporting base for industry?s next growth cycle. Hence, even with a weak growth outlook and an adverse business situation, a bottoming out of industrial growth appears unlikely.
?The writer is secretary-general, Assocham