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Economy: Good news, but...

Dec 18, 2002

The industrial sector was the laggard amongst the three sectors of the economy in FY02. While agriculture and services output grew by 5.9% and 6.2% respectively, the growth for the industrial sector was a meager 2.9%. One of the reasons for the low growth in the industrial sector could have been decline in agricultural output in FY01. Since two-thirds of the country's population is dependent on agriculture and related industries for their livelihood, a low agricultural demand impacts consumption.

Private consumption: driving growth
  Growth in
Growth in
Investment Overall Growth
1970-71 to 1979-80 2.3% 0.5% 0.9% 2.9%
1980-81 to 1989-90 3.9% 0.9% 1.6% 5.8%
1990-91 to 1999-00 3.3% 0.8% 1.9% 5.8%

However, thanks to the strong growth in agricultural output in FY02, industrial output for the fiscal FY03 could show a stronger growth as compared to the previous year. This is due to the fact that higher agricultural output in one year translates into actual demand with a lag effect. The impact is already evident from the industry growth numbers seen for the past three months. The general index of industrial production (IIP) between April to October 2002 has grown by 5.5% as compared to a growth of 2.5% in the corresponding period last year.

The strong growth in industrial output is also due to the pick up in demand for goods like steel and textiles. While the external sector is largely responsible for the improvement in demand for these industries, the Government has stepped up spending on infrastructure too. The Indian steel industry benefited immensely by the tariffs imposed against the European Union by the United States of America. Also, internationally steel prices have been on an upswing since the beginning of this year. The output of textile products grew by 17% for 1HFY03. This was driven primarily by the external sector (exports).

The user-based IIP for basic goods has recorded a growth of 4.9% for the period ended April to October FY02 as compared to growth 1.9% in same period last year. This points to an improving scenario. The IIP for capital goods also paints an optimistic picture. The IIP for the period between April to October grew by a steep 9.3% as compared to a decline of 5.9% for the corresponding period last year. The growth for basic and capital goods is likely to have emanated from the housing and road construction segment. A softer interest rate environment has seen a steep growth in demand for housing loans. Further, the government's aggressive spending on road construction has buoyed demand.

IIP growth...
Month Basic goods Capital goods
  FY02 FY03 FY02 FY03
Apr 3.3% 4.7% -4.4% -0.6%
May 0.9% 5.3% -3.9% 1.1%
Jun 0.1% 5.8% -9.8% 10.5%
Jul 0.1% 7.1% -7.4% 9.7%
Aug 2.7% 3.8% -7.7% 10.3%
Sep 4.3% 1.7% -7.3% 15.0%
Oct 1.0% 5.0% -0.3% 12.2%
Nov 2.7%   1.9%  
Dec 2.8%   -3.9%  
Jan 4.1%   -4.7%  
Feb 3.4%   1.1%  
Mar 3.5%   4.7%  

However, the good news stops here. One of the key concerns with the economy has been the absence of investment in the economy. Till October 4, 2002, bank credit to the commercial sector in the current financial year had increased by 11.3% as compared with 4.4% in the corresponding previous period. Excluding the impact of ICICI merger with the ICICI Bank, the comparable growth in credit for the current financial year was 5.4%. Growth mainly stemmed from the banking sector, while disbursements of All India Financial Institutions have declined by 46% (net of merger effect of ICICI Ltd and ICICI Bank). Advances from banks have been directed primarily to the retail sector (like housing loans). At the same time, off-take from the industrial sector has not been very encouraging. Thus, soft investment demand continues to be a cause for concern.

Going forward, a large number of factors acting in tandem could boost investment. Firstly, the central bank has adopted a soft interest rate policy. This has theoretically made capital available at a much lower cost to the industry. Further, government's focus on infrastructure spending is also a big positive. Improved infrastructure is likely to improve investment outlook. Also, a recovery in the industry is likely to bring in the accelerator affect. But drought like situation in 14 states, which will adversely impact the Kharif crop, could be a dampener for the industrial recovery in the short term.

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