India’s Growth — An Opportunity Missed?

India’s industrial growth plunged to a 21-month low of 3.3 per cent in July; the 3.3 per cent year-on-year increase in the official Index of Industrial Production (IIP) — the lowest since the 2.3 per cent of October 2009 — has primarily been dragged down by capital goods. The output of capital goods nosedived into negative territory by 15.2 per cent in July as compared to a growth of 40.3 per cent in the same month last year. This manufacturing sub-segment has, in fact, been showing huge volatility, having grown by 38.2 per cent in June. However, even intermediate goods — a proxy for investment activity in the economy — registered a negative growth rate of minus 1.1 per cent in July as against a growth of 8.5 per cent in July, 2010.

Among the major IIP segments, Manufacturing, which accounts for more than 75 per cent of the index, rose by a paltry 2.3 per cent in July. Within manufacturing (besides capital goods and intermediate goods), the basic goods sub-segment grew by 10.1 per cent (against 4.4 per cent in July 2010), with consumer durables (8.6 per cent versus 14.8 per cent) and non-durables (4.1 per cent versus minus 0.9 per cent) also doing relatively well. The cumulative industrial growth during the first four months of this fiscal worked out to just 5.8 per cent (compared with 9.7 per cent for April-July 2010-11), with growth rates at 6 per cent (10.5 per cent) for manufacturing, 1.1 per cent (8.2 per cent) for mining, and 9.4 per cent (5 per cent) for electricity. For the April-July period, capital goods production grew by 7.6 per cent (against 23.1 per cent in the four months of 2010-11), with the corresponding growth rates at 4.2 per cent (18.4 per cent) for consumer durables, 4.9 per cent (3.8 per cent) for non-durables, 7.9 per cent (5.2 per cent) for basic goods and 0.8 per cent (10.1 per cent) for intermediate goods. Prime Minister's Economic Advisory Council (PMEAC) Chairman viewed that the industrial growth target for the current fiscal — projected at 7.1 per cent — will have to be revisited.

Such growth numbers are not unanticipated given the central banks 11 rate hikes since March 2010 in a yet to succeed effort at cooling inflationary pressures. The problem is that India’s growth reversal comes at a time when the global economic gloom unleashed by the sovereign debt crises in the European nations as well as policy deadlock in the US has taken on enormous proportions threatening another fallback of some developed economies into recessionary territory. Economic recovery appears to have come close to a halt in the major industrialised economies, with falling household and business confidence affecting both world trade and employment, while the risk of hitting patches of negative growth going forward has gone up, according to the OECD. The palpable negative fallout of the fresh global downturn is bound to be a fall in export revenues; as markets accounting for close to a third of India’s exports (the European Union and US together) are stagnating or falling back into recession. Demand from developing Asia (excluding China) and the OPEC countries which together account for another 40 per cent of India's exports are highly unlikely to remain unaffected by the downturn either. The fact that governments have fewer options to boost growth are driving both business and consumer confidence downward; this is also true for India as falling growth and taxes now leaves the government with much lesser room for expenditure to boost the economy and spearhead much needed infrastructure investment. The uncertainty in the business environment created by the repeated rate increases through the year has also affected hiring intentions of businesses. One cannot but feel that India has missed an opportunity to address several issues pertaining to infrastructural bottlenecks and inclusive growth, during the post-crisis revival years — such steps would have lent more credibility to the inflation fighting exercise as well as to India’s growth story.