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| Editorial: No steam in industry | |
| Business Standard / New Delhi November 13, 2008, 0:21 IST | |
The numbers for the Index of Industrial Production for September 2008, released yesterday, were somewhat better than the previous month, but that is cold comfort. The index grew by a mere 4.8 per cent over September 2008, with manufacturing, accounting for almost 80 per cent of the index, growing at the same rate. This takes the growth rate for the first half of the current year to 4.9 per cent for the overall index and 5.2 per cent for manufacturing, in sharp contrast to the 7.4 per cent and 10 per cent that the two recorded in the first half of 2007-08. These numbers reinforce the sense that economic growth has slowed with unusual rapidity, with more to come. Not since the sluggishness of 1998-2002 has the industrial sector displayed such low growth rates in so many consecutive months.
The finance minister finds the latest numbers “encouraging”, after the August shock of 1.7 per cent growth, but there are some striking disparities across sectors which, when juxtaposed with data coming in from individual industries, suggest that the situation may be getting worse. Amidst the sluggishness, the ‘transportation equipment and parts’ segment grew by a significant 16.8 per cent in September, taking its growth rate for the first half to a handsome 12.8 per cent. In recent weeks, however, news about the sector has been dominated by reports of capacity being shut down in response to shrinking sales. Sales of passenger cars, for long the fastest growing product segment, have suffered in October. These patterns suggest that the October numbers for this industrial segment will show dramatically slower growth, if not a decline.
Similarly, ‘machinery and equipment’, reflective of new capacity being created in the economy, grew by an impressive 16.1 per cent in September and by just below 10 per cent in the first half. But the general impression now is that companies across the board are deferring their investment plans until things get better. The numbers for other segments, such as textiles, are consistent with the fact that exports decelerated dramatically in September. Reports that they will actually decline in October also point to a sluggish month for industry.
The numbers therefore give little reason for cheer. But some of the most negative aspects of the domestic economic environment are turning. Most importantly, world oil prices are falling—which means that the government does not have to raise domestic petroleum product prices, and the strain on the fisc eases. September had seen the emergence of a severe liquidity constraint, which compelled many businesses to reduce, if not cease, production. Over the past few weeks, the situation appears to have eased. Significant reductions in the repo rate on top of infusions of liquidity will begin to soften lending rates and bring borrowers back into the market. The steep declines in real estate prices will make a lot of properties attractive at the new, lower interest rates. Undoubtedly, all this depends on banks being willing to lend and borrowers confident that they can take on the debt. That confidence is not yet in sight; until it returns, no amount of liquidity and cheap credit will make a difference. But, at least for the moment, the risks of a deteriorating macro-economic environment compounding the problems of the financial sector have moderated in some respects.
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