(Weekly Organ of the Communist Party of India (Marxist)
June 7, 2009
The Slump In Manufacturing
C P Chandrasekhar
other area where the effect of the crisis is visible is capital
foreign investors having to reduce their credit dependence and meet
at home, they have been booking profits or selling assets in emerging
to mobilise the requisite funds. This affected
Finally, a third disconcerting feature of the emerging economic scenario is the evidence on industrial growth. The month-on-month annualised rate of growth of industry, as reflected by the index of industrial production, points to a sharp deceleration and subsequent contraction of output in the organised industrial sector. Month-on-month rates, which indicated a slackening of industrial growth during the first two quarters of 2008-09, point to significant worsening of industrial performance leading to negative growth rates during the subsequent two quarters.
While the export decline noted above could partly explain this adverse turn, the substantial dependence of Indian manufacturing on the domestic as opposed to the export market implies that the fundamental problem facing the economy is a slackening of domestic demand. This domestic demand recession is surprising for a number of reasons. First, even though the governmentís crisis-induced effort at providing a fiscal and overall demand stimulus to the economy remained half-hearted, that effort came on top of the fortuitous stimulus provided by the implementation of the Sixth Pay Commissionís recommendations, which included the payment of arrears that offered windfall gains to domestic consumers. In fact, those payments paid an important role in pushing up GGDP growth during the first three months of this calendar year. Since, the beneficiaries of the Pay Commissionís recommendations fall in the middle and upper-middle class categories, it is to be expected that their windfall gains and higher salaries would be directed towards demands for manufactures, besides luxury services. If despite that industrial growth has been indifferent or poor other factors must have neutralised the effects of this fortuitous stimulus.
of the crisis have been transmitted to
it is undoubtedly true that if these fortuitous stimuli had not played
the manufacturing recession would have been even deeper than revealed
extant numbers, the element of surprise is that those stimuli have not
able to prevent the downturn. The effects of the global recession are
stronger than expected. This in turn implies that all earlier talk of
other important means through which the global crisis is possibly
The depreciation of the rupee on the other hand would have increased the rupee costs borne by firms and agents who had borrowed from the international market in the past and had to meet interest and amortisation commitments in foreign exchange. Given the sharp increase in private external commercial borrowing in recent years, this too would have stretched available resources, affecting demand and production and even threatening bankruptcy.
Finally all of this would have also affected the state of liquidity in the system and more importantly the willingness of banks to lend. This would not only have impacted adversely on firms, but also on credit-financed housing investment, automobile purchases and consumption. These credit-financed sources of demand had expanded significantly in recent years, with advances for such purposes having increased sharply in absolute terms and as a share of total advances. Hence, the credit retreat (rather than squeeze) would have played an important role in triggering the recession.
experience has a larger lesson about the effects of liberalisation on
manufacturing growth in
In the event, if we undertake a medium or long-term assessment of industrial growth, the impact of liberalisation seems much less creditable than otherwise assumed. It is well known that after the balance of payments crisis of 1991 and the import-compression influenced contraction of manufacturing production in the early 1990s, the recovery of industrial growth began in 1993-94. That is the year which constitutes the base for the revised series of Indices of Industrial Production that is still in use. We therefore have a consistent data set on trends in industrial production as revealed by this lead indicator since 1994-95. Examining the month-on-month growth rate since April 1994-95, we find that industry experienced a mini-boom during 1993-94 to 1995-96 when month-on-month growth rates went as high as 18 per cent. However, 1996-97 witnessed a sharp downturn in industrial performance, after which industrial growth remained indifferent or poor for a long period stretching till the middle of 2003. A second boom occurred thereafter lasting till the end of 2006, when once again month-on-month manufacturing growth exceeded 17 per cent, though it was still short of the previous September 1995 peak. Starting early 2007, however, we have been once again witnessing a downturn, with rates now touching the negative lows we observe for March 2009.
In sum, if we take a long view, industrial and manufacturing growth rates have not been spectacular or even excessively creditable during the years of liberalisation or ďeconomic reformĒ. That period has largely seen indifferent or poor industrial performance broken by two short booms. This comes through quite clearly also from the year-on-year growth rates recorded since 1994-95 as revealed by the annual Industrial Index of Production (IIP) figures. This is not because liberalisation did not influence the sources and patterns of growth. It did. But its ability to trigger high growth was sporadic and limited because such growth clearly came from sources which were not sustainable.