Industry chugging along

Macroeconomic policy must sustain manufacturing growth

Recent industrial production numbers confirm that industrial growth is on track. The year-on-year growth rate of 15.1 per cent for February 2010 was a tad lower than expected, but strong enough to give confidence to producers that demand for their products is robust. The monthly growth number is still benefiting from a low base effect of last year, and the month-on-month sequential growth has slowed down marginally. But the manufacturing sector still grew by 16 per cent, though a tad lower than the nearly 19 per cent growth experienced in the more recent past. Capital goods and consumer durables grew at 44 and 30 per cent, respectively. Mining output grew at a healthy rate of over 12 per cent, and electricity growth rate was up at close to 7 per cent. Basic and intermediate goods’ output grew at a more modest rate of 8.4 per cent and 15.6 per cent, respectively. Consumer non-durables continued to show weakness, although there was improvement from the previous month. This sub-category includes fast moving consumer goods, and one explanation for its continued weak showing is that inflation is causing households to shift from branded grocery items to staples. If this explanation is correct, then non-durables will do better only when inflation abates. Otherwise demand robustness is also revealed by the spurt in non-oil imports as reported in the latest balance of payments data. Yet another independent corroboration of industrial revival is the data on bank credit. The incremental credit to deposit ratio is close to a remarkable 130 per cent, indicating that banks may soon face funding crunch, which, in turn, will put pressure on interest rates. If you juxtapose demand for industrial credit along with the government’s borrowing requirement, there is no question which way the interest rates are heading.

Against this backdrop of industrial health, clearly the focus of economic policy will be inflation control. Despite repeated promises, if with shifting dates, from various ministers and economic policy-makers that inflation is all set to come down, it has stubbornly refused to do so. Indeed, the yawning gap between prediction and outcome on inflation has seriously damaged the reputation of various economic policy-makers and spokespersons for the government. Apart from inflation, another macroeconomic parameter that is bound to impact on industrial production is the exchange rate. The recent appreciation of the rupee has begun to worry not just export-oriented sectors but also import-substituting industries. Policy-makers cannot afford to ignore the employment effect of an appreciating rupee if both export-oriented industries and import-substituting industries take a hit. In short, to sustain industrial production growth, the government must pursue a holistic monetary and fiscal policy that ensures price stability as well as exchange rate stability. The bottom line is simple — India needs a much bigger and more employment-intensive manufacturing sector if it has to sustain rates of growth upwards of 8 per cent. While the services sector remains the most important source of white collar employment, blue collar jobs have to come from manufacturing and infrastructure sectors.