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Pessimism persists in manufacturing sector - Views on News from Equitymaster
 
 
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  • Jul 17, 2000

    Pessimism persists in manufacturing sector

    The Indian economy is chugging along. GDP in FY00 has grown by a faster than anticipated 6.4%. Industrial production is up. Exports have rocketed. However amidst all these signs of economic buoyancy, one key element is missing.

    Investments. According to the Centre for Monitoring the Indian Economy (CMIE), outstanding investments in the manufacturing sector declined by 10.3%. A slowdown in investment activity reflects on the pessimistic sentiment pertaining to future growth in demand. Or to put it another way, manufacturers want to invest only minimal amounts in fresh capacity as they do not anticipate demand to remain buoyant in future. In effect, they doubt the sustainability of demand.

    A decline in investments can have serious consequences for the sector. First, the decline in investments itself reinforces the prospects of a slowdown in aggregate demand. Moreover, in case demand continues to rise, there could be demand supply mismatches, which would stroke inflation. Such a development could also highlight the fact that the manufacturing sector is spending smaller amounts on existing capital stock. Thus there is a possibility of deterioration in the quality of capital stock in the country, which in turn will impact the competitiveness of the sector as a whole.

    The decline in investments is however limited to only the manufacturing sector. Other sectors including mining (up 15%), electricity (up 14%) and services (up 17.2%) have shown a robust growth in investments. Overall, investments have grown by a 7%, but this masks the poor performance of the manufacturing sector.

    All in all, the decline in investments in the manufacturing sector needs to be treated with utmost urgency. Steps need to be initiated to improve the investment climate. A sustainable recovery would have taken root only when demand for consumption and investment activity picks up across all sectors.

     

     

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