Behind the industrial growth numbers

The growth performance of Indian manufacturing has been rather disappointing, of late. The index of industrial production (IIP) for manufacturing recorded a negative growth of minus 3.7 per cent in February 2014 (year-on-year basis), and in three of the previous four months too. The average growth rate during 2013-14 (April-February) was negative at minus 0.7 per cent, and it was only marginally better at 1.3 per cent during 2012-13.

Industrial growth understated The negative growth recorded by IIP-manufacturing for recent months, however, does not really mean that Indian manufacturing is experiencing a downward slide. IIP data have been understating the true growth in manufacturing sector output in recent years. In 2011-12, for instance, the growth rate in IIP-manufacturing was 3.0 per cent whereas the growth rate in real value added in manufacturing ( Annual Survey of Industries , CSO) was 10.4 per cent — a gap of over seven percentage points.

Thus, the growth rate in India’s manufacturing during 2013-14 could actually be about 3 per cent or even higher, notwithstanding the IIP data. Indeed, the Quarterly Order Books, Inventories and Capacity Utilisation Survey (OBICUS) of the Reserve Bank of India indicate that the inflation-corrected value of sales of manufacturing companies in October-December 2013 was about 3 per cent higher than that in the previous year, which applies also to April-December 2013.

Manufacturing output growth of 3 per cent or so in 2013-14, though much better than a negative or zero growth, is not good enough. It is too low in relation to what the country could achieve in the mid-2000s (over 10 per cent) and what the country needs.

A recent report of the McKinsey Global Institute ( From poverty to empowerment: India’s imperative for jobs, growth, and effective basic services, February 2014 ) observes that for making a substantial improvement in the standards of living of the Indian people and alleviating poverty, about 115 million new non-farm jobs will have to be created between 2012 and 2022 through across-the-board reforms and targeted public investment.

Of these, about 27 million new jobs need to be created in manufacturing. The required growth rate in manufacturing sector output is at least 10 per cent a year, probably higher.

Not global factors

One might think that the marked fall in the growth rate of Indian manufacturing in 2012-13 and 2013-14 is mainly a result of the global economic crisis. This view is not entirely correct.

The global economic crisis has no doubt affected industrial growth in India by curtailing the rate of expansion of external demand for India’s industrial products. Having attained a growth rate of about 12.7 per cent in 2010 and 6.5 per cent in 2011, the global exports volume grew only by 3.1 per cent in 2012 and 2.3 per cent in 2013.

The growth rate of India’s exports (in dollar terms) accordingly came down from 41 and 22 per cent in 2010-11 and 2011-12 respectively to minus 1.8 per cent in 2012-13 and then slightly improved to 4 per cent in 2013-14. But it would be wrong to ascribe the slowdown in industrial growth in India entirely or mainly to the slowdown in global trade. The value of India’s manufactured exports forms only about a tenth of the value of domestic manufactured goods production.

Also, nearly two-thirds of the manufacturing companies in India do not export, or export less than 10 per cent of their production. Evidently, a slowdown in global markets would have only a limited impact on the aggregate demand for products of domestic industrial firms.

Domestic demand The main explanation for the industrial slowdown in 2012-13 and 2013-14 probably lies in domestic factors. One such factor is the infrastructure constraints. Another factor is the erosion of business confidence which could, in part, be a reflection of the global economic crisis. The business confidence index of the Confederation of Indian Industries shows a fall from about 66 in the early 2010 to about 46 by the end of 2013. It may be added that the growth slowdown has been associated with a fall in capacity utilisation (OBICUS, RBI), traceable primarily to domestic demand constraints.

Revival of industrial growth in India requires a major hike in investment in infrastructure, large-scale development of industrial clusters, massive efforts towards skill formation among the youth to improve their employability, a re-invigoration of the process of economic reforms which will restore business confidence and raise industrial investments, and control of inflation. Lower food inflation will augment the purchasing power of households and thus help improve capacity utilisation in industries.

What is of foremost importance is to render support for enhancing the technological and cost competitiveness of Indian manufacturing. India needs to achieve greater penetration of the industrial goods markets of developing countries of Asia and Africa on the strength of technological capabilities, particularly with the help of frugal innovations. Also, efforts are needed to augment agricultural productivity, which will help contain food inflation and also create income in the hands of rural households, augmenting the domestic demand for manufactured products.

(The writer is Professor, Institute of Economic Growth, Delhi)

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