Industrial recovery may offset fall in farm output

Economists and policy makers have been pleasantly surprised by the sharp industrial recovery in India, which will nullify the impact of lower farm output due to deficit rains and enable the economy to grow at 6 per cent or more in 2009-10.

The recovery seems to be gaining momentum. Auto, cement and steel despatches are up, sales of medium and heavy commercial vehicles have turned positive for the first time in 14 months, prices of construction steel are up and so are property prices in key markets like Mumbai and the national capital region (NCR), and banks are again willing to lend.

Samiran Chakraborty, head of research, Standard Chartered Bank, says the industrial momentum is very strong, adding that the growth rate sequentially month-on-month is as high as what it used to be at the peak of the industrial cycle.

This is borne out by the sales of two-wheelers. “Typically, in a drought year, sales of two-wheelers begin to get impacted from August-September, which hasn’t happened this year,” says Manishi Roychaudhury, India head of equity research, UBS Securities. Two-wheeler major Hero Honda’s sales grew 36 per cent in August to over 400,000 bikes, more than 50 per cent of which are sold in rural and semi-urban areas.

The stimulus packages have done the trick. While waiver of loans improved rural incomes and spurred the sales of two-wheelers, increased pay of government employees improved the sales of compact cars in smaller towns. “If you look at the corresponding income profile, in smaller towns, the share of government employees in the pool of higher income growth is high,” says Abheek Barua, chief economist, HDFC Bank.

Crisil chief economist DK Joshi says that despite an errant monsoon, industrial growth will be better than last year. He expects the industry to grow at 6 per cent this year against 3.9 per cent last year. “Growth has not been broad-based but limited to sectors where the stimulus has been effective. But a lot of export-intensive sectors like textiles and jewellery are in dire straits,” says Joshi.

Industrial growth will partly offset the decline in agriculture, which is likely to shrink 2.6 per cent this year. That’s also because industry accounts for 26 per cent of the gross domestic product (GDP), while agriculture accounts for 16-19 per cent and services for the rest (55 per cent). So, higher growth in industry would compensate for a drop in agricultural production.
 

UPTICK
Various sectors show signs of recovery

* Various sectors show signs of recovery

* Automobile sales in August grew at over 24%, bettering 21% growth in July

* Tata Steel sells 25% more steel in August; JSW Steel increases output 53%

* Cement sales growing at 10-17% against a growth of 4% in October 2008

* Medium & heavy commercial vehicle sales turn around; grow 1% in Aug

* Sales of medium and heavy commercial vehicles are in the positive territory for the first time since June 2008

* Steel makers raise prices of construction steel by Rs 1,000 to 1,500 a tonne

* Real estate developers in Mumbai and Delhi selectively increase prices

In 2002-03, an industrial growth of 6.8 per cent had partly offset a 7.1 per cent decline in agricultural growth, and there’s a growing disconnect between agricultural and industrial growth.

“It’s a weak and nascent recovery, given the industry grew at 9-10 per cent between 2003 and 2008,” adds an economist.

The current traction is driven by consumption demand, led by pay hikes to government employees and waiver of farm loans, investment demand is very tentative and patchy though companies are showing interest. Credit is growing at 15 per cent, while it was growing at 29-30 per cent a year ago. While the economy may continue to grow at 6-7 per cent, for a faster growth, the demand for investment has to pick up. Typically, when growth picks up sharply, investment demand grows at 20-25 per cent.