As in life, the Indian economy has its ups and downs. Having expanded at a rapid clip of 8.8 per cent during the last four years, there are clear signs that this growth party has begun to flag due to the cyclical weakness in manufacturing. Overall industrial growth slumped to 5.3 per cent in January 2008 when compared to 11.6 per cent a year earlier.
The big question is whether these numbers indicate that the longest industrial upswing since the second quarter of 2002 has finally come to an end. Economists are notoriously ambivalent in their responses to such questions. To be sure, there have been several occasions earlier when industrial growth in a particular month sharply declined — like most recently during September or November 2007 — but expansion resumed thereafter. This was largely due to the phenomenal growth in production of capital goods or machinery and equipment that is a good pointer to a robust investment boom.
However, what is different this time around is the collapse in the capital goods production to 2.1 per cent, with machinery and equipment experiencing negative growth of 3.8 per cent in January 2008 — the lowest since 2001. This does not augur well for the investment-led upswing that has sustained industrial and overall growth till now. The weakness in consumer durables’ production has been evident throughout this financial year: Growth has, in fact, been in negative territory. Two-wheeler sales, in particular, have declined due to sluggish demand. Aware of this problem, the latest budget sought to boost demand for consumer durables by lowering duties. These dismal tidings from the latest industrial production numbers come when recessionary winds are blowing through the US economy, leading many agencies to lower their growth forecasts, including for India.
A slowing economy, that is also experiencing rising inflation, certainly does complicate the policy response. Straightforward remedies like lowering interest rates to stimulate demand for industrial goods become highly problematical as they stoke further inflation. On the other hand, targeting inflation through a tighter fiscal stance runs the danger of curbing growth. There are also some structural issues involved. Although the effect of a subdued performance of the agricultural sector on overall growth is not pronounced, the impact is more on the demand side as more than half the population depends directly or indirectly on this sector for earning a livelihood.
If crisis-conditions persist in this sector, wouldn’t the shrinking agricultural incomes affect demand for industrial goods? This factor certainly had a bearing on the cyclical downturn in Indian industry from 1996-97 onwards for seven years. Its impact on the incipient downswing in industrial production and overall growth cannot be discounted either.