Deceptive revival

The improvement in industrial production in 1999-2000 is not indicative of industry having traversed onto a higher growth trajectory, but the result of some once-for-all stimuli whose effects are already waning.

INDIAN industry, it would appear, has once again turned a corner. According to figures released by the Central Statistical Organisation (CSO), after three years of poor or indifferent performance starting 1996-97, the industrial sector has experienced a robust recovery during 1999-2000. The growth in the general index of industrial production, which stood at 8.4 per cent in 1994-95 and 12.8 per cent in 1995-96, had fallen to 5.6, 6.6 and 3.9 per cent respectively in the subsequent three years. The figur e for 1999-2000, however, points to a return to a higher rate of growth of 8.0 per cent.

What has been more encouraging from the point of view of government and industry is that this recovery has occurred predominantly in the manufacturing sector, where the rate of growth has risen from 4.3 to 9.0 per cent between 1998-99 and 1999-2000.

The developments underlying these movements in the index of industrial production have generated buoyant expectations in the corporate sector. According to a survey of "business confidence" recently conducted by the Federation of Indian Chambers of Comme rce and Industry (FICCI), 70 per cent of the 424 respondents expected industrial growth to rise from its 8 per cent level in 1999-2000 to 10 per cent this financial year.

Capacity utilisation, a majority of the respondents felt, would also rise to a comfortable 83 per cent, putting an end to the period of slow growth in production.

There are, however, three factors calling for caution while interpreting the implications of the industrial growth figures released by the CSO. First, the pattern of industrial growth underlying the overall improvement in growth is disconcerting. While t here are signs of a sharp recovery in the production of both intermediate goods and consumer durables, with rates of growth rising from 5.9 per cent to 15 per cent and 4.7 per cent to 12.2 per cent respectively, the performance of the capital goods secto r has been disappointing with growth actually declining from 11.8 per cent to 4.8 per cent. Thus, the revival of demand and utilisation appears to have been inadequate to spur investment, with demand for capital goods having decelerated during the same p eriod.

Second, despite the revival of industrial demand in a more open trading environment, non-oil imports have registered an extremely low rate of growth of just 1.36 per cent during 1999-2000. If recent experience is any guide, it is likely that once we dedu ct bulk imports and certain export-related imports, such as imports made by the gems and jewellery industry, from total non-oil imports, the rate of growth would even be lower. This points to a stagnation in imports required to service domestic industria l production.

It is widely accepted that import liberalisation has been accompanied by a sharp increase in the import intensity of domestic industrial production. This is particularly true and quite obvious in a high-growth sector like consumer durables, where interna tional brands assembled in India have substantially displaced indigenous products. This makes the almost contrary movements in industrial production and non-oil imports a puzzling development to say the least.

Finally, even before the extent and nature of the recovery in the industrial sector could be fully assessed, there are signs of a slackening of demand in certain industries. The automobile industry, where sales figures are quick to come in, is a case in point. It is widely accepted that the passenger car segment of this industry epitomised the recovery in 1999-2000, with sales having risen from 4,09,951 units to 6,38,815 units or by 55 per cent.

However, there has reportedly been a slump in sales in April 2000, with despatches relative to March having fallen by 31.2 per cent in the case of Maruti, 18.4 per cent in the case of Daewoo and 11.4 per cent in the case of Hyundai. While this decline ma y be partly explained by the bunching of sales at the end of the previous year because of last minute decisions to exploit the depreciation benefit for tax purposes, the magnitude of the decline in all cases does give some cause for concern. The magnitud es, in fact, seem reason enough to interpret this trend as evidence of an incipient slump in demand.

These developments accompanying the evidence of an industrial recovery, provide adequate grounds for scepticism regarding its sustainability. The evidence of a deceleration in capital goods production suggests that the recovery has yet to proceed to an e xtent where it has begun to influence expectations enough to spur investment. And the lack of correspondence between the increase in industrial production and the trend in non-oil imports indicates that the industrial recovery has not been adequate to wi pe out inventories of imported intermediates and components, needed for the more import-intensive production characteristic of the liberalised economic environment. When domestic production or assembly is more dependent on imported inputs, producers have to make advance calculations of their likely requirements of such inputs to ensure that they are in a position to meet emerging demand. These calculations must necessarily be based on expectations of such demand. It appears that, even though output in a reas like consumer durables has increased during 1999-2000, producers have not found it necessary to increase their stocks of imported inputs for future production. This points to excess stockholding as a result of unrealised expectations of buoyant dema nd in the past. It appears that the industrial revival over the last financial year has failed to clear these stocks to an extent which necessitated further imports needed to replenish stocks, given expectations of the likely trend in demand in the immed iate future.

Seen in these terms, the recovery in 1999-2000 does appear moderate. It is in the wake of this feature of the revival that the signs of a slump in demand in the automobile industry have to be assessed. If those signs are reflective of likely trends in th e coming months, then the revival in industrial performance during the final year of the last century appears to be a short-lived rather than a more long-run tendency. There are a number of factors which could have contributed to such a tendency. First, the unusually good monsoon in 1998-99, which raised agricultural production substantially. This would have contributed, with a lag, to a revival of industrial demand. With agricultural performance in 1999-2000 being much poorer, this effect would have si nce been considerably diluted. Second, the lagged effects of the windfall gains in the form of arrears payments associated with the implementation of the Fifth Pay Commission's recommendations, which are known to have spurred demands for consumer durable s. This effect too would have lost much of its potency by now.

Finally, the easy liquidity and lower interest rate regime put in place by the central bank, which could have contributed to a credit-fuelled revival in demand. This last element is the only one which could continue to play a role this financial year as well.

It needs to be noted that in explaining the recovery, the emphasis here is on a revival of domestic demand. This is because exports do not appear to have played any role in raising industrial production. Though India's merchandise exports registered a mo dest recovery in 1999-2000, with the growth of the dollar value of exports placed at 11.6 per cent as compared with a decline of 5.16 per cent in 1998-99, this growth could not have provided any significant stimulus to industrial production. Not only is the double-digit figure for 1999-2000 arrived at from the lower base resulting from the contraction in the previous year, but export growth during the previous industrial "boom" in the mid-1990s averaged a much higher 20 per cent per annum.

Thus "once-for-all" factors like a sharp improvement in agricultural performance and windfall income gains appear to explain the 1999-2000 recovery. Unless a credit-fuelled boom in demand or an unlikely boost to exports change matters substantially, the revival is unlikely to translate itself into a sustained industrial boom. And early evidence from the automobile industry suggests that this is not happening, providing the basis for expectations of a return to relatively low growth in industry in the co ming months.

This is not merely disconcerting in itself, but even more so because of the implications it has for the impact of liberalisation on industrial growth.

As mentioned earlier, besides 1999-2000, the only years in the post-reform period when industrial growth touched satisfactory levels were 1994-95 and 1995-96. That "mini-boom" too was the result of once-for-all influences, in particular the release of th e pent-up demand for a host of import-intensive goods, which in the wake of liberalisation could be serviced through domestic assembly or production using imported inputs and components. Once that demand had been satisfied, further growth had to be based on an expansion of the domestic market or a surge in exports. With neither being realised, industry entered a phase of slow growth. The evidence discussed above suggests that matters have not changed much since then. The improvement in industrial produc tion in 1999-2000 is not indicative of Indian industry having traversed onto a higher growth trajectory, but the result of similar once-for-all stimuli whose effects are already waning. In the event, the promise held out by the advocates of reform that l iberalisation would put Indian industry on a new growth path still remains unrealised.