But that is not all. Changes have been made to the estimates for the quarters of 1999-2000 as well, and those made to manufacturing are significant a reduction of over Rs 1,000 crore in each of the four quarters of the year. As a result, the rate of growth of manufacturing GDP has shot up to over 7 per cent in the first three quarters of 2000-01, while that for 1999-2000 has dropped to under 5 per cent. Quite the opposite of most peoples recollections of what had happened in manufacturing in those two years! Unless of course, there are changes to 1998-99 figures that will be revealed in the fullness of time. It is all doubtless part of that wonderful Indian mystique which keep us so flustered with forever re-writing our history. Wish the same attention were paid to the future.
As a result of all this, Q3 growth in 2000-01 has dropped from the earlier estimate of 5 per cent to 3.4 per cent and Q4 growth is down from the earlier 3.8 per cent to a mere 1.5 per cent. Just goes to prove what we have been saying all along that the real slump was towards the end of the last fiscal. So, high time people making policy stopped talking slowdown and recession. The problem today is what it has been for several years now stagnant growth rates in the region of 6 per cent. The fact that this growth has been on the back of weak expansion in manufacturing activities should give us pause. Unless, it can be shown that the current virtual stagnation in manufacturing output and value added is somehow consistent with a 6 per cent plus growth rate of overall GDP.
With all of its reported deficiencies, the Index of Industrial Production is the only measure of the progress of physical manufacturing output. And the IIP tells us that since 1997-98, output growth has been progressively slowing down, and has reached a snails pace in the current fiscal (2.6 per cent up to January 2002). Now, manufacturing IIP grew by 6.7, 4.4, 7.1 and 5.9 per cent in 1997-98, 1998-99, 1999-2000 and 2000-01 respectively. The corresponding rates of growth in manufacturing GDP for these years were 1.5, 2.6, 4.4 and 6.7 per cent respectively. That is, with the exception of 2000-01, physical output has been growing at some two times the rate of expansion in value added.
It is possible to argue that for the three years 1997-98 to 1999-00, in the manufacturing sector there has been improvement in technical efficiency, along with a possible improvement in productivity. Note a few other facts. First, that greenfield projects are rare today; almost all fresh fixed investment is in brownfield projects. Second, that Indian business has undergone, and continues to experience, an unprecedented order of merger and acquisitions; acquisition continues to be the preferred route for expansion. Third, that large companies have learnt well the lessons from the first flush of investments made after liberalisation. Today, they evaluate the competitive content and sustainability of their investment decisions, and look at a horizon that extends beyond the shores of the country; and they are careful not to overextend themselves.
So, despite depressed profitability, the manufacturing sector in the country is, perhaps, evolving into a much stronger sector. If restructuring is seeing productive assets steadily passing into the control of more capable companies, several issues arise. First, given that for so many years this process had been bottled up by hostile regulation, there is still plenty of scope left. Second, as long as the scope remains, companies will prefer to grow through acquisitions, and only then will corporate energies be focused on substantive new fixed investment. Third, if regulatory and other conditions do not improve in this country, there is no reason why Indian companies (leave alone foreign ones) will not look at more hospitable locations. Till then, industrial output growth will inevitably continue to be fuelled by consumer durables, and to a lesser extent non-durables, and construction intermediates like cement.
For policymakers the message is unequivocal: the slowdown talk is old hat and a dead end; work on improving conditions for business.
Saumitra Chaudhuri is economic advisor to ICRA (Investment Information and Credit Rating Agency) and editor of Money and Finance, the ICRA bulletin