The Hindu Business Line : An `industrious' year for economy

AFTER a hesitant recovery in 2003 and discernible signs of resurgence in 2004, Indian industry has shown unmistakable vibrancy in 2005. Industrial activity during the year was largely powered by the manufacturing sector, aided by a congenial domestic investment climate, improvement in world output, a liberalised regime of foreign direct investment (FDI) and surging manufacturing exports.

Evidently, the rising trend in corporate productivity and profitability following the efforts made by companies between 1997 and 2003 was further strengthened in 2004 and 2005. There has also been considerable upturn in industrial activity in 2005. Most industries are now working up to their optimum capacity levels. The strengthening of the industrial base has also been facilitated by the boom in automobile, telecommunication and consumer electronics industries, thanks to the increased flow of FDI.

The overall industrial output, which accounts for a quarter of the economy, grew 8.8 per cent during the first half (April to September) of 2005-06 on top of the 8.2 per cent growth in the year ended 2004-05. The manufacturing sector registered a higher growth of 9.9 per cent during the first six months of this fiscal, up from 9per cent in 2004-05. The growth in the Index of Industrial Production (IIP) in 2003-04 was 7 per cent. Since then, it has accelerated steadily. However, it needs to grow in double-digit for a sustained GDP growth of 8 per cent.

It may be noted that but for the lacklustre performance of the core sector industries, the IIP would have easily grown at around 10 per cent during the first half of this fiscal. The six core sector industries — steel, coal, cement, crude oil, petroleum refining and electricity generation, which have important implications for all other sectors of the economy — registered only a moderate growth of 4.4 per cent in the first half of this fiscal.

The buoyant growth in capital goods production, seen in both 2003-04 and 2004-05, continued during the first half of this fiscal. This, coupled with increasing imports of capital goods, augurs well for the continued dynamic growth of the industrial sector. During the first half of 2005-06, consumer goods — both durables and non-durables — maintained the impressive double-digit growth rates of the last two years.

Steel and cement industries put up a good show, thanks to rising demand and firming up of prices. The double-digit growth seen in the automobile sector over the last four years continued this year. In April-September 2005, while automobile production rose 15.9 per cent, export of automobiles increased even faster at 35.9 per cent.

Earnings growth at India's top companies has averaged more than 20 per cent over the past three years, despite rising global oil prices that have pushed up costs. Manufacturers have improved their competitiveness by cutting costs and boosting productivity. Borrowing costs that are near the lowest in three decades and the rising incomes in both rural and urban areas also helped the corporate sector in no small measure by fuelling domestic demand.

Not surprisingly, the country is now in the midst of an investment boom, which is much more robust than what was seen during the previous one of 1994-97. Textile, pharmaceutical, cement, steel, automobile, consumer electronics, chemical, petrochemical and oil refining industries have drawn up large-scale expansion plans in addition to new projects involving huge investments. Large-scale investments are also underway in infrastructure projects such as power, telecom, roads and ports.

The boom in business activity is also reflected in the sharp surge in non-food credit extended by the banking sector as also the greater resort to external commercial borrowings. Also, there seems to be greater reliance on equity finance compared to bank loans. Between April and October 2005, Indian companies mobilised Rs 51,459 crore through public offers, rights issues and private placements. In contrast, the banking sector has lent Rs 42,976 crore to the corporate sector over this period. Thus, the stock market has emerged as a major source of finance during the year. The booming equity market has helped this trend.

With the economy entering a higher growth path, the investment climate has turned distinctly favourable. India Inc has announced investments worth over Rs 500,000 crore to be spread over the next five years. Of these, investments of around Rs 200,000 crore are expected to materialise over the next 12-24 months. Huge investments are lined up in steel, aluminium, automobiles, telecom, oil refining and petrochemicals.

Most economists are of the view that there is unlikely to be a repeat of the boom and bust seen in the mid-1990s. For the Indian economy is certainly more resilient today with the demand for the products of many companies being more broad-based. Quite a few companies today are part of the global supply chains. Manufacturing exports have also been booming; exports of manufactured products registered growth rates of 20.5 per cent and 20 per cent in 2003-04 and 2004-05 respectively.

Thanks to the substantial rise in internal generation of resources, coupled with easy availability of funding options at affordable interest rates, not only there has been a surge in mergers and acquisitions (M&As), many large industrial groups have stepped up their overseas acquisitions. The upbeat economy and buoyant manufacturing exports seems to have emboldened the corporate sector to chase bigger dreams on the global stage. Thanks to the steadily rising foreign exchange reserves, which currently stand at around $143 billion, availability of foreign exchange is no longer a constraint and even banks are willing to provide finance for overseas acquisitions.

The value of mergers and acquisitions during January-November 2005 crossed an all-time high of $13 billion. The number of deals over this period was 245 compared to 237 during the whole of 2004. Overseas acquisitions by Indian companies have also gone up sharply in 2005. There were as many as 62 overseas deals till September 2005 worth $l.38 billion. Since then, more such deals have been signed till the middle of December, including the Tata Steels deal to buy a Thai company for $130 million, Uttam Galva Steels deal to buy US-based Detroit Steel, and Dr. Reddy's decision to buy Roche's pharma ingredients business in Mexico for $59 million. The total value of overseas acquisitions during the year is expected to exceed $2 billion compared to $1.7 billion in 2004.

These deals exclude the overseas acquisitions by IT and software majors such as TCS, Infosys and Wipro and were from traditional industries such as telecommunications, pharmaceuticals, auto components and other manufacturing businesses that have been trying to capture overseas markets.

The domestic pharmaceutical sector has emerged as one of the most aggressive overseas investors. Leading the charge are drug-makers such as Ranbaxy, Wockhardt, Sun Pharmaceutical Industries, Nicholas Piramal and Matrix Laboratories. With the new patent legislation in place, pharma companies have also been focusing on R&D of new drugs like their Western counterparts.

The year 2005 also turned out to be a chart-busting one for the stock market with the Sensex rising from 8,000 in November to 9,400 by mid-December. Thanks to the rising business confidence, foreign institutional investors (FIIs) have been pouring money into the stock market. Net investments by FIIs have raced past a record-breaking $10 billion by December 16, 2005. Net FII inflows in 2003 and 2004 were $ 6.6 billion and $ 8.5 billion respectively. FDI inflows into the country have also witnessed an impressive growth during the year. The actual FDI inflows during the year exceeded $5 billion.

Thus, it can be seen that IT hardware production and R&D are expected to receive a big boost in the coming years creating thousands of jobs and imparting, in the process, much greater efficiency to Indian manufacturing companies. While all these years, the thrust was on software, the recent developments are expected to unfold a promising Indian hardware story.