Manufacturing growth

Not much to cheer from industrial production data

The industrial output roller-coaster that India has been on, reflected by the volatile index of industrial production (IIP), is still going up and down. Thankfully, though in March 2011 it went up by 7.3 per cent. This compares unfavourably with the 15.5 per cent year-on-year growth registered in March 2010, but offers some cheer. Clearly, Indian manufacturing (that constitutes 80 per cent of the IIP) is facing a structural constraint, with the year-on-year growth at 7.9 per cent in March 2011 compared to 16.4 per cent in March 2010. Corresponding figures for mining and power were 0.2 (12.3 per cent in March 2010) and 7.2 per cent (8.3 per cent in March 2010), respectively. The capital goods industry was largely responsible for the year-on-year increase in the IIP during March 2011. For the current financial year as a whole, industrial output rose by 7.8 per cent, compared to 10.5 per cent in FY10. It is disappointing that growth in manufacturing reached double digits in only four months of FY2010-11. The manufacturing sector is confronted with constraints that are deeply structural and include inadequate infrastructure, the absence of a critical mass of secondary school graduates, a rigid labour market, the persistent discouragement of foreign direct investment (and even domestic investment), the inability to establish viable agglomeration economies (though some notable exceptions do exist), among others. In light of these deeply embedded problems, it is hard to relate to the government’s optimism about setting in motion an extended period of double digit growth in manufacturing a’ la China. The new manufacturing policy is still to be implemented, despite promises galore.

 

The sharp decline in the mining sector’s performance (it did not even grow by 1 per cent year-on-year!) has much to do with the restrictions on mining, especially of coal, which is the single largest contributor to the sub-index. The confusion over ‘go’ and ‘no-go’ zones and, in general, the populism of the ministry of environment and forests (MoEF) is impeding investment in this sector. This is bound to have adverse downstream effects, especially in power generation, given that thermal power contributes close to two-thirds of all electricity generated in India. The power transmission and distribution industry has expressed deep concern about its prospects, given how generating capacity is falling way short of targets (though the absence of secure fuel linkages is only one of many reasons for this).

If this continues, the industrial sector could well be caught in a vicious circle, not entirely of its own making. With inflation remaining stubbornly high, the industrial sector has had to absorb an increase in the cost of capital through higher rates of interest. This may dampen investor sentiment unless their ‘animal spirits’ are revived by concerted action, now that the season of politics is yielding to a season of policy. Jury is still out on whether the latest upturn is just part of a still declining trend or if it represents a turnaround after months of declining output growth.