The Hindu Business Line : Green in patches

With the growth in the country’s industrial output index more than doubling to 10 per cent since January, stakeholders are showing off a new spring in their step. The Reserve Bank of India’s recent policy review mentions an upswing in business sentiments; hiring among leading companies is on the rise as are wage hikes. Increments of 8 per cent are modest by the standards of the halcyon days when 20 per cent was routine, but they are an improvement on the Labour Bureau’s findings of job losses stabilising in the fourth quarter of 2008-09. Yet, these green shoots are not the only indicators of how substantial the revival could be. For those signs, policymakers need to look elsewhere.

Both the Reserve Bank of India and the Prime Minister’s Economic Advisory Council offer clues. The central bank has been repeatedly drawing attention to a shift in emphasis among the key demand components of GDP growth; private consumption and gross capital formation have slipped since last year with government spending becoming the main force stemming the fall in growth this year. Data, however, show that the gains have been partial; the biggest beneficiaries have been consumer durables, not the capital goods segment that has consistently declined over the same period. This is significant because the fall comes after seven years of consistent expansion in investments that contributed to the overall economy’s well being. In turn, the lack of growth in capital goods has been the result of sluggish demand from basic and intermediate industries, indicating once again just how restricted the revival is at present. In effect, green shoots have appeared only on a narrow strip of the industrial landscape occasioned by government spending while the uptick in operating and net profits reported by many companies has been the result of falling raw material and interest rate costs. The falling trend in private corporate investment noticed by the PMEAC and the RBI has yet to reverse its present pattern and how that is to be done is something policymakers need to focus on.

A good place to start would be those sectors and capital goods not affected by the slowdown. Electricity, railways and other infrastructure offer the best avenues for capacity expansion across capital goods, generate demand for investment leading to a more sustainable and inclusive rise in purchasing power than indefinite public spending. And the most efficient route to project completion is public-private partnership as the railways has discovered.

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