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Industry: Annus Horribilis! - Views on News from Equitymaster
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  • Feb 26, 2002

    Industry: Annus Horribilis!

    The index of industrial production (IIP) clocked a growth of 2.3% for the first three quarters of 2001-02 (FY02). This was a sharp decline compared to the 5.8% growth for the corresponding period of fiscal 2000-01 (FY01). Infact it is the lowest growth rate in since 1993. This gives a fair idea about the dismal performance for the industry for the fiscal ‘02. Already facing a tough demand environment due to poor performance for the agricultural sector for the past two years, the industry was further hit by the deterioration of the global economic scenario.

    The performance of the agricultural sector is a key factor as nearly two thirds of the population in the country derives its income from this sector. In FY01, the output of the agricultural and allied sector declined by 0.2%. This weakened the demand for industrial good and products. A host of other factors were also responsible for the poor performance apart from those mentioned. These included continued high real interest rates, industrial cycles, natural calamities (Gujarat earthquake), infrastructure constraints, lack of investments and lack of regulatory framework for the participation of the private sector in the country.

    However, for the fiscal FY02 the industry is expected to clock a growth of 3.3%. This means that the growth rate for the fourth quarter will be significantly high considering the fact that for 9mFY02 the industry has clocked only 2.3%. This is due to a recovery in the agricultural sector, which is expected to grow by 5.7% for FY02.

    Growth rates 9mFY01 9mFY02
    Mining and quarrying 4.4% 1.1%
    Manufacturing 6.0% 2.4%
    Electricity 4.8% 2.7%
    General 5.8% 2.3%

    The weak commodity prices could have been responsible for the low growth rate of the mining and quarrying sector. Aluminium, copper and steel prices were weak for most part of the year. However, in the recent past, prices for these metals have firmed up.

    In manufacturing, the sub-sectors that saw output decline in the nine months of the current fiscal included food products, cotton textiles, jute and other vegetable fibre textiles (except cotton), textile products (including wearing apparel), wood and wood products group and metal products and parts. Seven industry groups registered growth rates of less than 5%. Only four sub-sectors that included beverages, tobacco and related products, leather and fur products, rubber, plastic, petroleum and coal products and other manufacturing industries, grew by more than 10%.

    Used based classification (Growth rates) Weightage 9mFY01 9mFY02
    Basic goods 35.5% 5.1% 2.2%
    Capital goods 9.3% 3.0% -4.8%
    Intermediate goods 26.5% 4.8% 2.0%
    Consumer goods 28.7% 8.2% 5.0%
    Consumer durables 5.4% 17.8% 12.5%
    Consumer non-durables 23.3% 5.3% 2.3%
    Total 100.0% 5.8% 2.3%

    The use based classification reveals that investment into the industrial sector has fallen sharply. Capital goods was the only segment that recorded a negative growth rate. The non-food credit offtake has also shown a slowdown. Year to date (April 2001 to Jan 11, 2001) the offtake was 8.1% as compared to 12.7% for the corresponding period of the last fiscal. This is due to the fact that at one end the slowdown has hurt business sentiment and the fear of global competition has deepened the pessimism. The number of Industrial Entrepreneur Memoranda (IEMs) filed declined to 2,981 in FY01 from 3,058 in FY00 and the number of Letter of Intents (LOIs) filed declined to 117 from 203 in FY00. However, the proposed investment intentions of IEMs and LOIs of Rs 912 bn (US$ 19 bn) and Rs 13 bn (US$ 0.3 bn) respectively were higher than Rs 723 bn (US$ 15 bn) and Rs 10 bn (US$ 2 bn) in FY00.

    Banks and financial institutions have also become very prudent with their advances. This is to get a tight grip over the worsening NPAs (non-performing assets). Net NPAs in FY00 totaled 6.8% of the total advances. This has improved to 6.2% of total advances in FY01.

    The government on its part tried to tackle the structural reasons for slowdown that included lack of infrastructure (transport, communication and power), low levels of productivity and high real interest rates. The RBI reduced the bank rate by 150 basis points in September 2001. The government also kick started the golden quadrilateral and north-south-east-west corridors to improve transportation in the country. To improve productivity the government has tried to attract more FDI and speed up privatisation with the big-ticket sales that included VSNL and IBP. The reforms in the power sector have also been speeded up with focus now being on the transmission & distribution as compared to generation in the past. The effort also included rationalization of direct and indirect taxes.

    The FDI approvals during January to October 2001 at Rs 232 bn (US$ 5 bn) were lower than the Rs 326 bn (US$ 7 bn) approved in the corresponding period of last year. However, the actual inflow as percentage of approvals jumped sharply from 42% in FY00 to 62% in FY01. In absolute terms, the inflow for FY01 at Rs 161 bn (US$ 3.3 bn) was higher than that for the previous year at Rs 138 bn (US$ 2.8 bn).

    Small Scale Industry: Outperforming the industry
    According to projections made by the Ministry of Small Scale Industries (SSI) during FY01, the SSI sector recorded growth in production of 8%. SSIs have recorded higher growth rate than the industrial sector as a whole (4.9%), which is commendable. It contributed about 40% towards the industrial production as a whole and 35% of direct exports from the country. However, as on March 31, 2001, there were 249,630 sick SSI units, which had obtained loans from banks. An amount of Rs 45 bn (US$ 1 bn) of bank credit was blocked in these units. Of these only 13,076 units (5%) were considered potentially viable by the banks with outstanding credit of Rs 3 bn (US$ 625 m). This works out to be 9% of the total capital blocked. Further, banks have identified 2,25,488 units (90% of total) with outstanding bank credit amounting to Rs 39 bn (US$ 812 m) as unviable. Thus, 88% of the bank credit locked in is unlikely to be recovered.

    SSI FY00 FY01E Growth (FY00) Growth (FY01E)
    No of units (m) 3 3 4.2% 5.0%
    Production* (Rs bn) 4,167 4,504 8.2% 8.1%
    Employment (m) 18 19 4.0% 4.0%
    Exports (US$ bn) 13 13 7.5% 5.0%
    * constant prices (1993-94)        

    Industrial sickness: Culprit private sector
    According to information compiled by RBI from scheduled commercial banks, as on March 31, 2001, there were 2,52,947 sick/weak units consisting of 2,49,630 units in the SSI sector (99% of the total) and 3,317 units in the non-SSI sector. Thus, non-SSI sector accounted for only 1% of the total sick units. Among the 3,317 units, the private sector, public sector and joint/ co-operative sector accounted for 2,942 units (89%), 255 units (7%), and 106/14 units respectively. The total number of sick SSI units has decreased from 3,04,235 units to 2,49,630 units but the number of sick/ weak units in the non-SSI sector has increased from 3,164 to 3,317.

    The total bank credit blocked in sick units has increased from Rs 236 bn (US$ 5 bn) as on March 31, 2000 to Rs 257 bn (US$ 5 bn on March 31, 2001). The small-scale sector has Rs 45 bn (17.5%) blocked in its units while the non-SSI sector has Rs 212 bn (82.5%). Bank credit blocked in the non-SSI private sector was Rs 177 bn (68%) and that blocked in public sector units was Rs 29 bn (11%). Thus, the private sector is largely responsible for the deteriorating NPA situation.

    Industrial relations: Improving
    At an aggregate level, there was a decline in the number of strikes and lockouts during 2000 compared to the previous year. Strikes declined from 540 in 1999 to 426 in 2000. This was a drop of 21%. The decline in lockouts was lower at 11% with the number of lockouts coming down from 387 in 1999 to 345 in 2000. However, the mandays lost in 2000 was higher by 7%. The reduction in strikes and lockouts was prominent in the public sector and in the State sphere. The states of West Bengal, Tamil Nadu, Gujarat and Andhra Pradesh experienced maximum instances of strikes and lockouts in 2000. The industries facing the highest incidence of strikes and lockouts were textiles, engineering and coal mining. Wages, indiscipline, violence and personnel reason were the main reasons behind the incidents. For FY01, the numbers have fallen even more sharply. There were only 221 incidents of strikes till September 2001. If the figure is annualised it translates a steep drop 44%. The number of lockouts has also shown a decline during this period. The most positive aspect is that the number of mandays lost has also fallen sharply. Based on annualised figures for FY01 the figures show a 38% decline.

    Agriculture led rebound
    Strong growth of 5.7% expected from the agricultural sector is going to be the key factor responsible for the turnaround in the industrial sector. Consequently, the industrial sector is expected to close the year with a 3.3% growth. However, two strong positives emerged from the industrial survey. First, the increased FDI flow that is 16% higher for the period between January to October 2001 (YoY). Also, the improvement in the industrial relations is visible by the sharp decline in the number of strikes especially at a time when divestment is going ahead with full speed. The credit for this could also be attributed to the judiciary that set a right example in the Balco case. The industrial sector can look forward to good times ahead thanks to the agricultural rebound pulling at one end and the government’s steps to structural reforms pushing from the other. However, a lot still needs to be done by the government and the external sector remains a big cause for concern.



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