It seems that all the vital statistics of the Indian economy are heading in the wrong direction. For the UPA government in a poll-bound year that was just about coming to terms with an ascending inflation rate and a descending Sensex, the news about the stalling index for industrial production (IIP) must come as a rude shock.
Figures released by the ministry of statistics reveal an alarming drop in the industrial growth rate for March 2008 when compared with March 2007?-a drop to just 3 percent from 14.8 percent the previous year. The picture for the entire financial year 2007-08 is less alarming, but there?s still a decline in industrial performance from the previous financial year?-industrial growth has dropped from a rate of 11.6 percent in 2006-07 to 8.1 percent in the financial year just gone by. Most of the decline is in manufacturing which accounts for two-thirds of the weight in the index for industrial production.
A CII-ASCON survey also confirms the bad news from manufacturing. The number of sector reporting excellent or good rates of growth in 2007-08 has fallen significantly from 2006-07. According to the survey, 17 sectors reported negative growth rates, which confirm the overall trend of declining performance.
Shocking as the collapse in industrial performance is, especially for the month of March, it is not entirely surprising. Indian industry has been under pressure for the past one year on account of a number of factors, most of which is beyond the control of Indian industry.
A major factor behind the slowdown is the continued reign of high interest rates, something the CII survey holds responsible for the slowdown. The situation is unlikely to change in the short run as inflationary pressures and expectations will dissuade policy makers from making any major cuts, even though the current bout of inflation is a supply side problem, which is unlikely to be controlled through monetary policy. Still, with the ruling government facing general elections in a year and many crucial assembly elections before then, any change in an unnecessarily risk-averse interest rate policy is unlikely.
A related reason for the slowdown is the credit crunch facing industry both on account of higher rates of interest domestically and the global credit crunch following the sub-prime crisis in the West. Again, any change in this situation looks unlikely in the short run, despite the furious cuts in interest rates by the US Federal Reserve. Banks remain reluctant to lend.
The steady appreciation of the rupee, coupled with the decline in the US dollar has not helped manufacturing, even if it helps contain inflation. The overall slowdown in the US and Europe, which remain the world?s largest markets, has also put pressure on exports. The slowdown is likely to continue till at least the end of this calendar year.
The CII survey also cited rising input costs as a reason for a decline in industrial performance. A lot of the rise in input costs can be explained by the rocketing price of oil. Oil prices are already hovering at around $125 a barrel?-many analysts suggest that $60 should be the actual price?-and some analysts, including one from Goldman Sachs, predict that it will rise further. A highly charged American election campaign with candidates from both parties making hawkish threats about Iran will undoubtedly fuel expectations of further strife in the Middle East, and a further rise in oil prices.
These short-term (read one year) factors apart, there are more general reasons for concern about the future of manufacturing in India. Crucial reforms, such as changes in our antiquated labour laws, have remained stalled during the tenure of the UPA government. At the same time, very little has been done to invest the necessary sums of money, and to inject necessary doses of efficiency, into India?s crumbling physical infrastructure best typified by the almost hopeless condition of our ports-air and sea.
Even the much vaunted and flaunted Golden Quadrilateral project of world-class highways has slowed down. Indian firms are now increasingly looking to invest their money abroad. Nationalist euphoria aside, this outflow of investment is a reason for concern. It is a little known fact that outflows of direct investment from India exceeded inflows between 2002 and 2004, a most unusual and indeed startling statistic for an emerging economy. The simple truth is that India still isn?t attractive enough for manufacturers, whether Indian or foreign.
A lot needs to be done to revive manufacturing industry. Obviously some measures are needed in the short-run to stabilise what can now be described as ?critical condition? on account of external factors. Perhaps the interest rate regime can be relaxed in the short to medium term. The rupee has already begun weakening. But short run measures apart, much more needs to be done to deepen economic reform. That?s the key to real industrial revival.
dhiraj.nayyar@expressindia.com