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India Inc.: Growth blues

Oct 13, 2000

The slowdown in the Indian industry is for real. How else would one explain the slowdown in the growth in index of industrial production (IIP) from a high of 11.8% in February to 4.8% in August 2000? The concerns are well founded.

  Weight FY99
Apr - Aug
Apr - Aug
Basic goods 35.5 4.4 5.1
Capital goods 9.7 11.8 -0.8
Intermediate goods 26.4 9.3 5.7
Consumer goods 28.4 3.0 7.5
Industrial growth 100.0 6.2 5.3
The IIP numbers for August 2000 clearly indicate that there has been an across the board slowdown in industrial activity. The worst performer by far has been the capital goods industry. This needs to be explored further, as it has a number of significant implications for the economy. In order to generate sustainable growth, along with consumption, investment activity is crucial. However, in India's case there has been an absence of a pick up in investment activity, ever since India emerged from the recent slowdown. This is clearly borne out by the fact that non-oil imports continue to be sluggish, even as the domestic capital goods industry, as the numbers indicate, is actually witnessing a decline in output.

  Weight FY99
Apr - Aug
Apr - Aug
Basic goods 35.5 4.4 5.1
Capital goods 9.7 11.8 -0.8
Intermediate goods 26.4 9.3 5.7
Consumer goods 28.4 3.0 7.5
Industrial growth 100.0 6.2 5.3
During the first five months of the year, the situation was similar expect for the fact the consumer goods production grew at a faster pace as compared to the previous year. This could probably be attributed to the rise in demand triggered by international sporting events.

There have been two contributors to this slowdown - drought in parts of the country and the subsequent floods in the east. Both these factors dealt the initial deathblow to the momentum of industrial growth. And just when the Indian industry seemed like recovering from these crises, the oil crisis broke out threatening to suppress consumer demand. If this was not enough, a leading economic think tank, in India, CMIE, recently issued a release that the monsoon, even though ‘normal’, was not sufficient. This would, it stated, suppress growth in agricultural output for the coming year. Given that over 60% of India's population is dependent on agriculture and related incomes, this has grave implications for consumer demand.

The situation is definitely grim, and the outlook too. However there are certain rays of hope for the industry. The first is that exports continue to be buoyant. They grew by over 25% in the first five months of the year. The second, as Dr Y V Reddy, Deputy Governor of the Reserve Bank of India, says, the fact that bank credit continues to grow robustly (and is in line to meet annual targets) is sufficient enough to downplay the industrial slowdown as a more temporary phenomenon. Also, with central government finances witnessing some buoyancy for the first time in years, the likelihood that industry will slip into recession is slim.

The numbers clearly highlight the plight of the industry. However, whether the slowdown is more permanent is still debatable.

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