In the doldrums again

COVER STORY

Indian Economy

In the Doldrums, Again?

The failure to achieve stability in industrial growth in an economy is still characterized by extremely low levels of consumption and penetration

F

rom the 3rd quarter of FY11, industrial and manufacturing growth in India has shown a clear sign of losing steam. This is evident from the fact that a sustained industrial recovery from the slump triggered by the global crisis has been elusive (overall growth has been shored up by the more stable performance of services and has not shown a dip of similar magnitude). The tendency in most commentaries have been to attribute this recent industrial slowdown to temporary factors like the inflation-induced rise in interest rates. The problems however run deeper. When seen in a longer-term perspective, the slowdown in the industrial sector should be a matter of concern for a variety of reasons.

FROM THE 3RD QUARTER OF FY11, INDUSTRIAL AND MANUFACTURING GROWTH IN INDIA HAS SHOWN A CLEAR SIGN OF LOSING STEAM

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Historically Speaking Amongst the world’s major economies, developed as well as developing, India has the lowest level of attainment of industrialization (the process of increase in the share of industry in output and employment). The share of the industrial sector in India’s aggregate GDP peaked in the mid 1990s, that were comparatively speaking extremely low, and the per capita levels of industrial output are still exceptionally poor. The inability to achieve prolonged spells of sustained industrial growth has July 15, 2011 | 47

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Indian Economy been an endemic feature of Indian industrialization and that problem clearly has not disappeared. In the post-liberalization period, there was a 6-year-long period of industrial slump from 1997-98 to 2002-03. The subsequent surge proved short-lived as the global crisis erupted in 2008 and the ‘recovery’ from it has been even more temporary.

Stability Not Seen The failure to achieve stability in industrial growth in an economy is still characterized by extremely low levels of consumption and penetration. Industrial products are symptomatic of a deeper malaise. This has meant the absence of a broad based growth of demand for manufactured products. Those who would spend rising incomes increasingly on manufactured consumer goods have not experienced such income growth. Those at the upper end of the income ladder whose incomes have increased rapidly on the other hand are diversifying their demand with an increasing proportion going towards services. In such circumstances, it is not consumption growth but investment and specifically private corporate investment which has become the principal expenditure influencing industrial growth. The period of industrial slowdown from 1997-98 to 2002-03 was characterized by a collapse of private corporate investment.

The subsequent 5-year period saw an exceptional recovery of private corporate investment and it increased in real terms at nearly 30% per annum. This investment boom however is now showing signs of petering out and with it the industrial growth is also being pulled down. The ultimate cause of this however are not the temporary factors that often occupy most of the attention.

Facing Adversity The essential problem with sustaining rapid growth of private corporate 48 | July 15, 2011

investment is that while much of this investment tends to go into manufacturing, a disproportionate share of the growth in output comes from services.

Manufacturing investment creates demand for industrial products but it simultaneously increases the capacity for producing these products. An excessive dependence of industrial demand on manufacturing investment unsupported by adequate consumption growth creates the tendency for capacity creation in manufacturing to outpace demand growth. Any investment boom therefore becomes prone to collapse. This is precisely what happened in the 2nd half of the 1990s after a phase of rapid investment growth. The revival from that to a period of rapid growth of investment from 2003-04 onwards was a product of the transmission effects of rather exceptional global economic conditions. These conditions no longer exist. The global economy may be saved from completely sinking after the crisis but is far from returning to the pre-crisis situation.

In addition, India’s investment boom had even this time been accompanied by the imbalance which brought down the previous boom. Nearly 30% of the increase in fixed capital stock between 2003-04 and 2007-08 were accounted for by the organized manufacturing sector. The sector however contributed less than 8% of the increase in net domestic product over the same period. Another collapse of manufacturing and corporate investment was therefore imminent even without the global situation turning adverse.

Clearly therefore the serious challenges confronting India’s industrial sector cannot be overcome by simply trying to promote private investment through so-called ‘confidence-building’ reforms. More substantive efforts like stepping up of public investment and translating ‘inclusive-growth’ from a mere slogan to a reality are necessary. n visit www.dqindia.com

MORE SUBSTANTIVE EFFORTS LIKE STEPPING UP OF PUBLIC INVESTMENT AND TRANSLATING ‘INCLUSIVEGROWTH’ FROM A MERE SLOGAN TO A REALITY ARE NECESSARY

DR SURAJIT MAZUMDAR The author is the associate professor, economics, Bharat Ratna Dr BR Ambedkar University, Delhi (AUD) maildqindia@cybermedia.co.in

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