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IIP – The scoreboard - Views on News from Equitymaster
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  • Feb 24, 2001

    IIP – The scoreboard

    What was turning out to be good news suddenly turned around and became a cause for concern. The index of industrial production (IIP), which measures the growth of the secondary sector (industry) of the GDP, showed a decline of compared to previous year’s figure. The IIP growth rate from (April – December) for FY01 stood at 5.7% compared to 6.4% for the corresponding period last year (FY00).

    Government had earlier projected an industrial growth rate of 8.2%, which was later scaled down to 5.9%. The index of industrial production, which comprises of four sectors namely mining, manufacturing, electricity and use-based iips (consumer and capital goods), was hit by the slow down in the manufacturing and electricity sector. For December 2000 the growth rate for the manufacturing sector was a low 3.3% compared a substantial 9.3% in December last year.

    In November the manufacturing sector had registered a strong growth of 6.5% compared to a low growth of 3.7% in the same month in the pervious year. The manufacturing sector for the first eight months had grown by 6.3% but its performance in December spoilt all the figures.

    For figures click here

    The industries that have shown a drop in growth rates include beverages, tobacco and related products, cotton textiles, basic chemicals and chemical products, non-metallic mineral products, basic metals and alloys and machinery and equipment.

    While the growth rates of consumer goods (durables and non-durables) have gone up there was a dip in the growth rates basic, capital and intermediate goods. The deceleration in demand for the capital and intermediate good indicates the industry’s uneasiness about the future in terms of growth, competition, costs, technology and most importantly, profitability. For basic goods the figures dipped from 5.2% last year to 4.8% this year. Intermediate goods grew at 4.7% compared to 9.1% for corresponding period last year. Capital goods too recorded a deceleration with the growth rates coming down from 7.5% last year to 3.2% this year.

    For figures click here

    On the other hand growth in consumer goods indicates a rise in disposable income. The growth rate for the current year was 17.5% compared to 14% last year. The concern might be that a certain (affluent) strata of the society may be pushing up the figures and not the masses. But this would certainly add momentum to the growth of the industry.

      Weight Avg. Annual
    growth rate
    Avg. Annual
    growth rate
    to 1991-92)*
    to 1999-2000)*
    Index of Industrial Production      
    General 100 7.8 6
    Manufacturing 79.4 7.6 6.3
    Mining 10.5 8.4 3.3
    Electricity 10.2 9 6.6
    Use-based classification      
    Basic goods 35.6 7.4 6.1
    Capital goods 9.3 9.4 5.9
    Intermediate goods 26.5 4.9 9.1
    Consumer goods 28.7 6 6.3
    of which      
    (i) Consumer durables 5.4 10.8 11.2
    (ii) Consumer non-durables 23.3 5.3 5.1
    GDP-Manufacturing at 1993-94 prices      
    Total   6.1 7.4
    Registered   6.8 8.1
    Unregistered   5 6.2

    Source : indiabudget.nic.in

    During the period of January-November 2000, 2,789 Industrial Entrepreneurs Memoranda (IEMs) and 192 Letters of Intents (LOIs) were filed, with proposed investment intentions of Rs. 698.1 bn and Rs 9.6 bn respectively. Despite increase in the number of IEMs, the volume of investment committed was lower than last year. On the FDI front there was an up trend with proposals worth Rs 328.4 bn being approved compared to Rs 266.5 bn last year. While cumulative foreign investment approved till November 2000 was Rs 2,426 bn, he actual inflow of foreign investment was Rs 854 bn, constituting 35% of the approvals. The inflow to approval ratio increased to 47% in January-November 2000, compared to 44% in January-November, 1999. This indicates a greater confidence in the economic environment and political stability of the country.

    During 1999-2000, the SSI sector recorded production growth of 8.2% over the previous year, higher growth rate than the industrial sector as a whole. However, the major problem facing this sector was the sickness of SSIs. There were 0.3 m sick SSI units as on 31st March, 1999. These units were those who obtained loans from banks. An amount of Rs 43 bn was blocked in these units. Of these only 18,692 units were considered potentially viable by the banks with their outstanding bank credit amounting to Rs. 3.8 bn.

    While the government has taken a number of steps like providing low cost capital to the industry, removal of redundant laws and streamlining inspection, the government has to foster the entrepreneurial spirit in the country through education and access to resources.

    Industrial Sickness
    According to information compiled by RBI from scheduled commercial banks, as on 31st March 1999, there were 309,013 sick/weak units consisting of 306,221 (99%) units in the SSI sector and 2,792 units in the non-SSI sector. Among these 2,792 units, the private sector, public sector and joint/ co-operative sector accounted for 2,363 units, 263 units, and 154/ 12 units, respectively. But when it comes to the capital blocked, the SSI accounted just 22.2% of the total while the non-SSI was responsible for the rest.

    Industrial Relations
    At the aggregate level there was a decline in the number of strikes and lockouts during 1999 compared to the previous year 1998. However, the figure in terms of mandays lost actually increased. While there was an increase in mandays lost in the state sphere and private enterprises the central sphere showed a decline. Tamil Nadu, West Bengal, Andhra Pradesh and Gujarat experienced maximum instances of strikes and lockouts in 1999. The industries facing the highest incidence of strikes and lockouts were coal, mining, engineering and cotton textiles. Wage and wage related issues were the important reasons behind the strikes along with personal issues and retrenchment related matters.

    Markets have been eagerly waiting for the government to move out of business like telecom, oil and gas. So far this year the performance of the government has been quite disheartening with it being able to achieve only 18% of its divestment target of Rs 100 bn.

    Disinvestment in Public Sector Undertakings
    (Rs bn) Target Achievement  
    1991-92 25 30 121.5%
    1992-93 25 19 76.5%
    1993-94 35 Nil -
    1994-95 40 48 121.1%
    1995-96 70 4 5.2%
    1996-97 50 4 7.6%
    1997-98 48 9 18.8%
    1998-99 50 54 107.4%
    1999-2000 100 18 18.3%

    The negatives

    The major factors responsible for the slowdown of industrial growth are:

    • High oil prices.
    • High interest rate environment due to continued fiscal deficit.
    • Lack of domestic demand for intermediate goods.
    • Low inventory demand for capital goods.
    • Infrastructure constraints particularly power, roads and transport.
    • Monsoon failure that led to fall in agricultural output.
    • Excess supply in certain sectors
    • Business cycles

      The major issues that are hindering growth for the industry are at a more micro level, which need to be addressed as quickly as possible. Like labour problems in certain states and infrastructure in others.

      The effort should be to build a strong manufacturing sector that stands for technology, productivity and quality. The government has taken steps where in capital is available to the industry. But what about technology? This does not stop at just using foreign technology but also create technology and IPR that will earn precious dollars for the country. Why the demand for more IITs is only from the IT sector? Do engineering colleges need to cater only to the new economy? What about the core sectors? The private sector to has its limitations with bottomlines in mind has a limit to its commitment to development of technology. Therefore, the onus is on the government.

      Also on the quality and productivity front the industry in India has a long way to go. With foreign competition the Indian industry will at least get targets to achieve. And this time it has to pep up its act for its very existence is at stake. The government should aid this by changing the labour laws so that the Indian industry is not crippled against competition. While looking at improving efficiency in the industry the government should begin with introspection. That will give a good idea about what the problem is and when the government manages to tackle this, perhaps it can aid the industry.

      All, we can hope is that the fervor and love the government has shown towards the IT sector is extended to the industrial sector too.



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