The Hindu Business Line : Make industrial sector the engine of growth

With the business environment for the industrial sector turning favourable, it is the right time to initiate measures to make this sector an engine of growth and to raise its share in GDP. The thrust of the growth strategy should be more public and private investments in both urban and rural infrastructure, says S. D. Naik.

THE phase of prolonged slowdown and demand recession appears to be finally over for the Indian industry. The manufacturing sector is now doing well not only domestically but globally as well.

A number of factors such as restructuring, cost-cutting, better capacity utilisation, lower interest rates, and a dip in inventory levels have helped the corporate sector to come out with better profit margins in 2002-03 and during the first quarter of 2003-04.

After a long spell of nervousness, the sector is now exuding confidence to take on competitors in the international markets.

However, the industrial recovery is still rather weak and appears to be waiting for some triggers to gather momentum. The industrial growth measured in terms of the index of industrial production (IIP) during the first quarter (April-June) of this grew 5.3 per cent compared to 4.3 per cent during April-June 2002. This growth rate is still lower than that achieved during 2002-03.

The index for six infrastructure industries — electricity, coal, crude oil, petroleum refining, cement and finished steel — grew just 4.1 per cent in the first quarter of 2003-04 against 6.2 per cent during the corresponding previous quarter.

Except for electricity, which showed a marginal improvement, all the infrastructure industries registered a lower growth during the first quarter this fiscal compared to the previous period.

The industrial growth staged a recovery after languishing for five years and plummeting to a nine-year low of 2.7 per cent in 2001-02. The average industrial growth rate for the five years ending 2002-03 was just 4.8 per cent per annum despite the recovery in the last year compared to the annual average growth rate of 8.2 per cent in the preceding five years ending 1997-98.

The industrial revival so far is still modest because it is concentrated in only a few select sectors such as steel, cement, automobiles, consumer durables, textiles and pharmaceuticals. Large segments are still struggling, especially in small and medium enterprises (SMEs), which depend heavily on institutional finance.

Thus, while a fair segment of Indian manufacturing has now become globally competitive and improved its financial performance significantly, the sector as a whole has yet to gain momentum.

When one looks at the macro picture, it appears that the growth in sales and net profit of the corporate sector has more to do with an overall rise in commodity prices, higher exports, growing other income and lower interest rates, apart from an improvement in capacity utilisation and better inventory management.

Significantly, the profit growth is nearly four times the growth in sales during the quarter April-June 2003.

Robust export growth or over 19 per cent in dollar terms in 2002-03 no doubt played a crucial role in supporting the industrial revival. Industries cutting across different sectors recorded higher growth in exports as compared to the growth in their domestic sales. This reflects the competitive strength gained by Indian industry over the past few years.

Some of the key industries that recorded higher export growth than the growth in their domestic sales include aluminium, steel, cement, automobiles, auto components, electronic components, paints, plastics, refractories, cigarettes and tobacco, nylon filament yarn, and air and gas compressors.

However, it is rather puzzling that despite industrial recovery, the growth in commercial bank credit remained quite subdued during the first quarter of the current fiscal. Non-food credit went up by a mere Rs 2,550 crore during April 1 to July 11 this year.

By contrast, during the same period of 2002-03, the rise in non-food credit was over Rs 16,000 crore, or nearly four times. It is possible that better inventory management may have resulted in corporates pruning their working capital needs to some extent.

Some of the larger companies may also be tapping cheaper funds overseas as global interest rates are at their historic lows. However, this option is not available to SMEs. Hence, the lack of credit growth may be more because of the absence of any substantial new investment activity so far.

The industrial growth that has occurred during the last quarter could be largely attributed to better utilisation of capacities created earlier. The latest business confidence surveys show an improvement in capacity utilisation, which is expected to rise further over the next six months.

The IIP registered a growth of six per cent during the month of May this year and 5.7 per cent in June, thus showing significant improvement over 4.4 per cent growth recorded in the month of April. Going by the rise in business confidence indices, the recovery is expected to accelerate in the coming quarters.

The CII has projected an industrial growth of 6.5 per cent this fiscal. Even so, that would still be way below the peak rate of growth of

13 per cent achieved in 1995-96. During that year, the manufacturing segment had recorded a growth of 14.1 per cent.

Acceleration of industrial growth rate to double-digit level is essential for the achievement of the targeted eight per cent annual GDP growth during the Tenth Plan period.

Even to achieve the GDP growth rate of 6.5 per cent to 7 per cent during the Plan period, the industrial sector has to grow at more than eight per cent per annum. But that may not be possible so long as new investment in the sector does not pick up significantly.

True, of late, companies have been investing significant amounts for enhancing productivity and improving product quality. They have also been benefiting from expenditure incurred on information technology to support various operations. This is no doubt a welcome development that has helped the corporate sector to improve its competitive strength and push up export growth in spite of some depreciation in the exchange value of the rupee over the past year.

Unfortunately, however, as yet there is no clear evidence of any significant revival of capital expenditure in the corporate sector on creation of new capacities despite the all-pervading optimism and the fact that India Inc is currently sitting on a pile of cash, banks are flush with liquidity and interest rates are at an all-time low.

A major constraining factor appears to be the continuing weakness in domestic demand because of inadequate purchasing power in the economy.

Perhaps, the situation may change over the next two quarters as the agricultural growth this year is projected at over seven per cent. Better performance of agriculture should spur rural demand for the industrial products. Moreover, export growth is expected to remain satisfactory this year on top of the resurgence witnessed last year.

In fact, the latest trade data holds out some promise of the investment activity picking up in the near future. During April-June 2003, there has been a big jump in non-oil imports after a long time, registering a hefty growth of 31 per cent, mostly comprising raw materials, intermediates and capital goods. Such high growth in non-oil imports was last seen in the mid-nineties when large capacities were created.

However, while some of the advance indicators point to an impending revival of investment activity after the virtual investment famine over the past few years, suitable policy support from the Government is necessary to ensure that the trend is sustained over a longer period.

For this, it is imperative that the rate of employment generation and purchasing power in the economy is increased through increased investment in the agricultural sector and encouraging labour-intensive manufacturing activities.

Over the last five years, manufacturing has been trailing behind the average GDP growth rate. The poor show of industry and, particularly, its manufacturing segment, was largely responsible for pulling down the average GDP growth rate to 5.36 per cent during the Ninth Plan period (1997-2002). It is necessary to step up the annual industrial growth rate to 8 to 10 per cent to ensure that the GDP grows at seven to eight per cent.

Since the business environment for the industrial sector has now become favourable, it is the right time to initiate measures to make this sector an engine of growth and to raise its share in the GDP. The thrust of the growth strategy should be more public and private investments in both urban and rural infrastructure, including small irrigation projects, rural roads, horticulture, floriculture, agro industries, tourism, housing and public health.

Mr Jaswant Singh's maiden Budget did focus on infrastructure development aimed at stimulating industrial recovery; it proposes total infrastructure spending of Rs 60,000 crore spread over the next few years.

However, no firm investment plans are in place so far. There is an urgent need to speed up the implementation of the plans already approved. For large-scale employment generation holds the key to accelerating industrial growth rate.

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