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IIP worries - Views on News from Equitymaster
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  • Mar 13, 2001

    IIP worries

    The figures for Index of Industrial Production (IIP) released for the month of January are rather worrying. The IIP has fallen to 2.8%. What is even more frightening is that the growth in the manufacturing sector has fallen down to 2.9% in January 2001. For December 2001 the growth figure for the manufacturing sector was 3.3%. Comparatively, the figure for January 2000 was 5.6% and a strong 9.3% in December 2000.

    The economy has been plagued with a host of factors working against growth like monsoons failing and high oil prices. A good monsoon ensures cheap raw material for the manufacturing sector. Added to this the manufacturing sector is facing stiff global competition.

    In the budget the government made two major moves that were almost sacrilege in political terms. Firstly, the government reduced the interest rates for small savings effectively making cost of capital cheaper for the industry. Why the manufacturing sectors stand to gain the most is due to the fact that this industry works on the lowest of operating margins and therefore, lower cost of borrowing would certainly help bottomlines. The second bold move was regarding laying off employees. Organisations employing less than 1000 employees can now hire and fire at will. This means 99% of the factories in India can now have employment policies without government intervention.

    The labour issues traditionally have been a major deterrent to the development of a favourable climate for industrial growth. For example, in West Bengal the jute industry that has the advantage of availability of raw materials, is ailing due to labour unrest. This is not to say that the managements were not at fault but the main culprit was the government that never took a stand that would have helped the development of the industry. But now, things seem to be changing or rather the change is being forced upon them. The competition is from China where the labour laws are very strict. As a result the goods produced cost a lot less (as productivity is high). With the strategy of cost competitiveness the Chinese threat of capturing the Indian markets looms large.

    However, one issue that has been completely ignored is that of technology. Not only the global competition is competing with a superior work force but a much superior weapon – technology. The government’s next effort should be concentrated at the technological upgradation of the Indian manufacturing sector.

    Coming back to the IIP, its other constituent, electricity, too showed disheartening growth. The figure was down to 1.4% from 3.2% in the corresponding month last year. The growth rate for electricity was 3.8% in December. One the Mining front the figures were rather positive with the growth rate jumping to 3.5% compared to 0.4% in January last year. For December the figure was 3.4%.

      Apr 00 to Jan 01 Apr 99 to Jan 00
    Manufacturing 5.6% 6.8%
    Mining 4.2% 0.5%
    Electricity 4.5% 7.2%
    General 5.4% 6.3%

    India seems to have missed the Industrial revolution and has directly jumped to the services bandwagon. But with most of the services being exported the economy gradually becomes more and more dependent on the foreign economies on which we have no control. A good example is the keen interest with which everybody is following the US slowdown, as the fate of the Indian software industry (that now accounts 20% of the exports) hangs in balance. Already there are reports of software professionals being sent back to the country or asked to delay their trips abroad.

    All we can hope for is that the effects of bold moves taken by the finance minister get implemented at ground level and a climate for industrial development is created across the length and breadth of the country. This would be one critical factor that would decide India Inc.’s fate as an economic superpower.



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