The Hindu : Industrial revival: Cautious optimism

Online edition of India's National Newspaper
Tuesday, Dec 03, 2002

Business

Business

Industrial revival: Cautious optimism

By Prem Shankar Jha

There is a quiet but palpable feeling of relief in industry. Judging from the most recent trends in the economy, the small industrial revival that began earlier this year is being maintained. Industrial production grew by 6.1 per cent, year-on-year, in September. This was on top of the 6.7 per cent recorded in July and 5.7 per cent in August. Better still, the impetus did not come from the infrastructure and mining sectors but from manufacturing, which grew by 7.9 per cent. More direct evidence that the industry may have turned the corner has come from that war-horse of the `old economy', steel.

Sensing a turnaround in demand, steel companies raised their prices at the beginning of this year. This did not lead to any contraction in demand. As a result, their profitability has improved steadily. Managers of a number of large banks have expressed their satisfaction that all the steel companies have met their interest payments in the third quarter of this year. Better still, most of them have begun to clear their overdue interest payments too.

Other industries in which bankers see signs of a spreading recovery are textiles (particularly spinning), engineering, automobiles, and consumer goods. Textiles turned around only in August, after having recorded a decline in growth, in relation to the previous year, for five straight months. In October and November more and more companies in this sector have begun to approach banks for loans to finance expansion. The optimism needs, however, to be hedged with caution.

Developments suggest that the revival is likely to weaken in the second half of the year (October-March). An early signal has come from the cement industry, which had been in the forefront of the mild economic revival in the last nine months. In September it grew by only 3.4 per cent. This was a large drop from the 11 per cent average growth between April and August. There was a similar, though less steep, decline in the rate of growth of the steel industry. In September this was 4.3 per cent against an average of 8 per cent during the previous five months.

The reason for the slowdown in growth in these two industries is almost certainly the sharp setback suffered by agriculture in the kharif season. Thanks to the drought last July, the estimated kharif foodgrains harvest is 18.7 per cent below what it was last year. The output of cash crops such as sugarcane, oilseeds and cotton will also be lower. This is bound to reduce the income of farmers and therefore the demand for consumer goods.

Past experience has shown that basic construction materials such as steel and cement are the first to be affected. Again, if the past experience is any guide, one can expect automotive vehicles, especially two-wheelers and tractors, to be affected next. This could, however, be cushioned to some extent by the reflationary effect of much higher procurement prices that the governments of food surplus States have offered to their farmers as a `drought bonus', and by a decline in imports of gold and silver, which are still the favoured form of saving in rural areas.

State governments have made the drought a pretext for offering a Rs. 20 a quintal `drought' bonus to paddy farmers over and above the prices fixed by the Centre. Not surprisingly, despite the decline in production, procurement of paddy in Punjab is marginally higher than what it was at the same time last year. Farmers are also offsetting the impact of their lower income on consumption by saving less out of it.

In April-July this year, gold and silver imports dropped to Rs. 973 crores from Rs. 2,034 crores in the same period last year. As a result, more than Rs. 1,000 crores of purchasing power, that could have flowed out of the country, has remained within it. The trend is likely to be maintained during the rest of the year. All in all, these trends will at most reduce the contractionary effect of the poor monsoon.

The likelihood of the industrial recovery weathering the setback in agriculture would have been greater if the initial recovery had kicked off a rise in investment. But judging from the resources raised from the capital markets as of October, this has not happened. In April-October, this year the amount raised was 23 per cent below the already non-descript amount raised during the same period last year. Where money has gone, instead is in the purchase of Government securities. So long as the fiscal deficit remains mountainous, and continues to rise, banks will continue to invest in the plentiful supply of government bonds, and interest rates will not fall. The real rate of interest will therefore remain high and this will ensure that manufacturers continue to postpone investment.

Printer friendly page
Send this article to Friends by E-Mail

Business