The RBI’s move to lower interest rates last fiscal did not result in much of an improvement in the non-food credit off take, though some recovery was seen in 4Q of the fiscal 02. One of the most likely causes for the weak credit off-take could be the Indian industry registering a feeble growth of 3% in FY02 as compared to a 5% growth in FY01. The growth registered in FY02 is a nine-year low.
As far as the slowdown in the industry is concerned, weak demand for industrial goods is the culprit. Economics tries to answer what is to be produced, how will it be produced and for whom it will be produced. ‘For whom’ here is the Indian population, 70% of which is derives its income from agriculture and animal husbandry.
Bad monsoons in FY99 and FY00 have caused agricultural output to decline in FY00 and FY01. The agricultural production during these two years declined by 2% and 6% respectively. However, there is more. With increase in population, land holding of the farmer has decreased and therefore, his ability to earn has been impaired. This has reduced his disposable income, which in turn is reflected in lower consumption.
The Indian economy too, like the US economy, derives a significant part of the growth in output from the growth in private consumption. As long as the consumption remains depressed the industrial growth will likely be subdued. While fiscal policy can only impact the consumption marginally, since only 2% of the population pays taxes, what needs to be addressed immediately is consolidation of land holdings and improved irrigation facilities to reduce the dependence on the rain Gods.
|1970-71 to 1979-80
|1980-81 to 1989-90
|1990-91 to 1990-00
The ‘use based index’ of industrial production (IIP) has revealed a more worrying fact. The capital goods recorded a 4% decline as against a 2% growth in FY01. Investments in industry is a pre-condition for economic growth and thus, declining investments are a cause for deep concern. It a well established fact that investments take off when the economy is growing swiftly. This is known as the accelerator effect in economic jargon. This works the other way too. The swift decline in the growth rate for used IIP based on capital goods, is likely due the weak business environment adversely impacting the business outlook and hence, investments.
However, is the depressed economic scenario the only reason for decline in investments? Most likely not. In 1992, when India opened its door to the world, it was assumed that private investments (from within and abroad) would lead the growth. The IIP based on capital goods, showed a strong growth till FY99, indicating strong growth in investments. The growth in investments was likely due to the fact that businesses were inspired by a strong growth in industry seen from FY93 to FY96. However, post 1999 there has been a steep fall in the demand for capital goods.
Was the industry disillusioned by the way things worked? Though successive governments have promised a lot, things have not changed much at a ground level? Another theory seems to suggest that the Indian industry has traditionally been protected and is now hesitant to face global competition. Of course, age-old issues of infrastructure constraints, excess capacity in certain industries, lack of confidence in the legal system and corruption did their bit to scare investors away. Yet another reason could be the availability of other investment opportunities. The software boom saw companies directing their efforts towards the services sector. And now India is set to become the back office of the world. Thus, the industry is likely to be enamored for some more time by the growth opportunities from the new economy.
Meanwhile, serious thought needs to be given to the cause for decline in investments. The monsoon in FY02 was excellent and this was reflected in the growth in agricultural produce. While a recent CII survey recently talked of an eminent industrial recovery, there continued to be concerns regarding growth in the capital goods sector. Business investments are a must for sustainable economic growth, and lowering interest rates are not enough. The Government immediately needs to improve the aggregate demand. This will have to stem from the increased consumption on part of the majority of the population. Reducing dependence on the rain Gods seems to be the first place to start.