Sameer Pushp*
The Indian economy in value term is the 12th largest; it is the fourth largest by purchasing power parity (PPP) and second fastest growth wise. It is important to note that during the last three years, our economy have been severely impacted, but has successfully withstood two shocks in rapid succession: first was global financial crisis leading to the collapse in world growth, trade & financial system in 2007-09 whose ripple continue to persist even today; and second was year 2008-09 domestically, was a year of erratic monsoon which resulted into year of severe drought in 2009-10. Yet, Indian economy is coming through it with resilience and strength.
Industrial Growth Hit Hard
The industrial growth in India is measured in terms of index of industrial production (IIP) which continued to fluctuate in last three years. IIP-based cumulative industrial output growth during April-December 2010 was 8.6 per cent, on a par with the growth rate of the corresponding months of the previous year. It is to be noted that overall growth decelerated to 3.2 per cent in 2008-09 because of global economic meltdown. Timely intervention of the Government by way of appropriate monetary and fiscal policies resulted in the sharp recovery and overall industrial growth improved to 10.5 per cent. Growth in the industrial sector was buoyant during the first two quarters (April-June, July-September) of the current financial year. Thereafter, industrial output growth has begun to moderate partly due to higher base effect.
Industrial sector in India is divided into three broad sectors – mining, manufacturing and electricity. Manufacturing accounts for 79.4 per cent of the weight in IIP and the weights assigned to mining and electricity is 10.5 per cent and 1.2 per cent respectively. IIP data is measured by ‘use based classification’ which is segmented into five broad groups: basic goods, capital goods, intermediates, consumer durables and consumer non-durables. Industrial sector has a share of 20 per cent in GDP. A moderation in industrial growth, therefore, affects the GDP growth proportionate to its share in GDP. Pressure on industrial growth, including manufacturing sector, became intense in 2008-09. Global economic slowdown impacted the Indian economy, particularly the industrial segment impinged by pull and push of domestic and external demand. The impact was widespread but worst hit were all the three key segments viz., mining, manufacturing and electricity. Government acted swiftly to the winds of change and timely intervention resulted in a quick recovery.
Policy Activism by the Government
The Government to sail through crisis resorted to policy activism and came up with three quick stimulus packages amounting to Rs.1,86,000 crore which was to the tune of 3.5 per cent of India’s GDP. It generated the much needed push in demand with a new set of optimism. Response to the global crisis was through fiscal and monetary policy interventions. The monetary and fiscal policy response intended to keep the impact of global crisis to the minimum and maintaining the aggregate demand at high enough level to stimulate the hard hit sectors. On the fiscal front the response essentially had two components- reducing excise duty by 6 per cent in two phases and rates of service tax by 2 per cent; and enlarging the Government expenditure to infuse confidence. On the monetary policy front, RBI undertook steps to expand liquidity. This was done to address the issue of Indian firms, during crisis to raise funds abroad, including trade credit, which had in turn put pressure on domestic banks for more credit. In a span of seven months between October 2008 to April 2009, the repo rate was reduced by 425 basis points to 4.75 per cent and reverse repo rate was reduced by 275 basis points to 3.25 per cent. Further, RBI reduced cash reserve ratio by a cumulative 400 basis points to 5.0 per cent.
Winds of change after Interventions
With these measures in pace, turn around in industrial sector began around June 2009 and continued to gather momentum. Overall industrial growth reached a peak of 18 per cent in December 2009, which was highest growth achieved since 1993-94. Manufacturing with its six core sectors has a weight of 26.68 per cent in overall IIP, (i.e. electricity, coal, crude petroleum, petroleum refinery products, steel and cement) also witnessed a sharp V shaped recovery and growth peaked to an all time high of 91.6 per cent in December 2009. Though even today month on month growth continued to fluctuate, overall industrial growth continued to be generally healthy. This clearly shows that timely intervention by the Government paid off.
According to the use based classification, capital goods posted a growth of 20.9 per cent during 2009-10 as against the 8.2 per cent during 2008-09. This classification also revels that consumer goods sector registered a growth of 6.2 per cent during the same time frame. Basic and intermediary goods industries posted a growth of 7.2 per cent. Basic goods and capital goods and intermediate goods registered a growth rates of 6.1 per cent, 16.7 per cent and 9.2 per cent respectively. Six core industries which is the backbone of our industrial growth registered a robust growth of 5.5 per cent during 2009-10 as compared to 3.0 per cent in 2008-09.
India’s policy advantage
World over we were acknowledged for out monetary and fiscal management during the global economic meltdown and thereafter. There are few things that are unique about our stimulus package, in the process of liquidity injection the counter-parties involved were banks – there was no dilution of government securities or mortgaging of securities or commercial papers to any country. In terms of fiscal incentives, the increase in public expenditure was to stimulate rural economy and it did not go for recouping losses of the financial institutions or the corporate. In turn it created a long term productive assets through MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act.), which provided remunerative prices to the farmers through a system of minimum support price.
To sum it up, there has been a significant capacity addition in some of the core industries. Undoubtedly, a robust growth and steady fiscal consolidation regime has now become the hallmark of the Indian economy. But, slow rate of capacity edition in physical infrastructure sector is constricting industrial sector growth. Capacity addition in core sectors and renewal of bottlenecks would spur industrial sector output in the medium to long term.
*Freelance Writer
Disclaimer: The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of INVC
