Economic Slowdown

Indian industry is on life support – and the government’s denial of this isn't helping

Multiple indicators, from factory output to low demand for bank credit, show that the manufacturing sector is in the doldrums.

Prime Minister Narendra Modi, riding to power on the promise of economic growth, launched his Make in India pet project in September 2014 to boost manufacturing and reduce dependence on imports.

The project aimed to create more jobs by enhancing India’s potential of becoming a manufacturing hub, specially for electronics, in the next three years.

Two years on, however, the results of the government’s push to industry have been lacklustre.

The numbers talk

In the last year, the index of industrial production – which measures the growth in various sectors such as mining, electricity and manufacturing by surveying data provided by companies – has declined steeply. As compared to 9.9% month-on-month growth in October 2015, there was a contraction of 0.7% in August (from July). This was the second consecutive decline in the index, which fell by 2.5% in July.

Though the representativeness of the index of industrial production has been questioned, a Mint report on Wednesday said that the April-August performance is the worst in a decade – something the government cannot afford to ignore.

Optimistic government

Despite these signs of a slowdown in industry, the commerce and finance ministries remain optimistic about India’s growth potential. They claim that the falling exports and slowing industry data are going to stabilise in the near-term.

“At the moment, the fall is arrested,” Commerce Minister Nirmala Sitharaman said on Monday after two consecutive months of falling exports. “We will only be looking at steady growth. It may be slow but steady.”

Before this, exports had declined for 17 consecutive months before picking up in June.

In September, Finance Minister Arun Jaitley insisted that the steel industry, reportedly the biggest contributor to non-performing assets of public-sector banks, was showing signs of a turnaround. The month before that, he said India had defied the global slowdown and seemed poised for high-growth on the back of services sector.

However, recent data – including that from the Reserve Bank of India – contradicts these statements.

The latest RBI data points to a slowdown in the manufacturing sector as its order books (where orders are registered) have declined year-on-year. A negative growth of 2.6% is projected for the last quarter of the 2016-'17 financial year from the last quarter of the previous fiscal year. In comparison, the 2015-'16 financial year had started on a high, with 10.2% growth in the first quarter of that year.

“The demand conditions in the Indian manufacturing sector continued to remain subdued, as can be reflected from the trajectory of capacity utilisation,” the RBI said in its monthly statement in September. “Overall, Indian manufacturing sector did not appear to witness any turnaround, as indicated by the survey results.”

Outlook grim

A closer look at the index of industrial production numbers for the manufacturing sector paints an even grimmer picture. The manufacturing index of industrial production has been declining steadily and saw a negative growth of 4.7% growth in the first quarter of financial year 2016-2017.

A report in the Indian Express on Wednesday said that bank credit or loans to the industrial sector had decreased by 0.2% year-on-year in August – slipping into negative for the first time in a decade.

An examination of the gross bank credit to the industry based on data from RBI’s September monthly review (in the chart above) showed that credit to sectors like textiles, construction, petroleum and beverages declined between 1-7% in the current financial year.

A massive 13.3% decrease in credit was recorded in the food processing industry, while chemicals, gems and vehicle industry received marginally more credit.

While Jaitley has repeatedly sought a reduction in interest rates to boost the Indian economy and new RBI Governor Urjit aPatel cut repo rates by 25 basis points earlier this month, economists do not think this will fix the manufacturing sector. The repo rate is the rate at which the RBI lends to banks. A lower repo rate increases banks’ access to credit and so should result in lower interest rates for customers.

“The demand in the economy over the last couple of years has come down to a level that capacity utilisations are at around 75%,” DK Pant, chief economist at India Ratings was quoted as saying by Indian Express. “In such a scenario, no investor will invest and I don’t think a cut in interest rate can fuel investment.”

No jobs

Another objective of the Make In India program was to create more jobs for the burgeoning labour market in India (by creating a thriving industry), but that has not happened yet either. The annual report by the Ministry of Labour and Employment showed that unemployment in India rose to a five-year-high at 5% in the 2015-'16, while the female unemployment rate was 8.7%.

“In the manufacturing sector, growth has come predominantly from improvement in efficiency and not too much due to a rise in output, so the growth in employment is much slower,” Proban Sen, former chairman, National Statistical Commission told the Hindu. "Second, the pattern of employment in the corporate sector is changing. Companies are looking to hire productive workers so there is a reduction in absorption of labour.”

All this points to a difficult time ahead for the Indian industry and the Modi government would do well to acknowledge the problem rather than arguing over numbers, as Dinesh Unnikrishnan summed up in this Firstpost article:

Clearly, there is no magic wand with finance minister Arun Jaitley to make the problems vanish in a moment. But, he could engage with the private sector more actively to put money on the table. Also, the public spending that acted as a major catalyst needs to continue with pace. Despite the hype over the Modi government’s investment focus, the fact remains that there has not been a substantial jump in private investment to support growth. The government needs to acknowledge the problem and see what can be done to crack it.

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