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The provisional
estimates of the Index of Industrial Production for
November 2000 released recently by the CSO suggest that
industrial growth during the first eight months of fiscal
year 2000-01 (April-November) has fallen to a low of
2.2 per cent from the not-too-creditable 5.7 per cent
during the corresponding period of the previous year.
If this trend persists, the overall trend rate of growth
during the decade 1991-92 to 2000-01, which was the
decade of accelerated economic reform, is likely to
be worse than during the immediately preceding ten years.
As Chart 1 shows, the trend rate of growth during the
years 1991/2-1999/2000 was, at 6.7 per cent, exactly
the same as during the years 1981/82-1990/91. However,
protagonists of reform have argued that 1991-92 was
an unusual year of adjustment, and should be ignored
when estimating the trend rate. But even during the
period 1992-2000, the growth rate was only marginally
higher at 7.3 per cent, and is likely to fall significantly
for the period 1992-2001, if the annual rate of growth
in 2000-2001 remains close to the 2.2 per cent recorded
during the first eight month of that years. Thus, in
terms of the aggregate rate of industrial growth there
appears to be little difference in industrial performance
during the 1980s and 1990s.
Chart1
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It
is indeed true that the IIP is only a lead indicator,
that in the past has been known not to be too reliable
an indicator of actual trends in the registered industrial
sector as revealed by output and value added figures
from the Annual Survey of Industries (ASI), that become
available only after a two year gap. An index capturing
movement in production as suggested by inter-temporal
production relatives, the reliability of the IIP can
be adversely affected by its inadequate coverage and
persistent problems of poor response from reporting
units. However, it is indeed surprising that during
the 1990s the IIP seems to track quite well movements
in GDP at factor cost from the industrial sector defined
to include Manufacturing, Construction, Electricity,
Gas and Water Supply. The latter figure includes production
in both registered and unregistered units. While it
may be true that the provisional industrial GDP figures
for the most recent years are computed using trends
suggested by the IIP, pending the release of ASI estimates,
the long term correspondence between the two growth
series mapped in Chart 2, strengthens the reliability
of the trend indicated by the IIP.
Chart
2 >>
Further,
the growth figures as revealed by the GDP at factor
cost in registered manufacturing, which are available
separately for 1990-91 to 1994-95 with 1980-81 as base
and for 1994-95 to 1998-99 with 1993-94 as base, point
to a similar trend in the IIP over time, though the
figures using base 1993-94 yield much higher growth
rates than both the older National Accounts Series and
the IIP.
Overall it appears that during the 1990s the IIP does
provide a reasonable guide to industrial trends despite
its many shortcomings. Using the IIP therefore, we could
argue that after falling sharply in 1991-92 as a result
of the import compression and stabilisation resorted
to by the government in response to the balance of payments
crisis, industrial growth recovered quite well, rising
to 5.6 per cent in 1993-94, 9.1 per cent in 1994-95
and 12.3 per cent in 1995-96. After that, however, the
industrial sector has witnessed a downturn, with the
rate of growth falling to 6.1 and 6.7 per cent in 1996-97
and 1997-98 and slipping further to 4.1 per cent in
1998-99. There were signs of a recovery in 1999-2000
with the rate rising to 6.5 per cent, but subsequently
the pace of growth has slackened substantially, standing
at just 2.2 per cent during the first eight months of
fiscal 2000-01. What is more, the figures on GDP at
factor cost for the industrial sector as a whole (registered
and unregistered units in
Manufacturing, Construction, Electricity, Gas and Water
Supply) suggest that the decline in the growth rate
in 1997-98 and 1998-99 was even sharper than suggested
by the IIP for those years.
Chart
3 >>
In sum, the trend growth
rate in the IIP for the 1990s as a whole, is not just lower than what was
seen during the 1980s, but conceals two periods of sharply divergent
trends: a period of recovery and growth during the first half of the
1990s, followed by a period of slump during the second half of the 1990s,
which has recently been aggravated, after a brief promise of a possible
return to growth. If the trend of the second half of the 1990s persists
into the first half of the first decade of the new century, we can expect
that the economy would be soon afflicted by a severe industrial recession.
Chart 4 takes a closer look
at the years of the down turn, by examining quarterly growth trends
(relative to the corresponding quarter of the previous year) in the
general index as well as manufacturing IIP for the period stretching
between the second quarter of 1995 and the third quarter of 2001. The
picture here is more complex. From a peak of close to 15 per cent in
manufacturing and just below 14 per cent in the case of the general index,
growth slumped to a low of less than 3 per cent in the first quarter of
1997. This was followed by a recovery that lasted three quarters, which
took manufacturing growth to 9 per cent. But the recovery proved
short-lived and Indian industry once again experienced a slump till the
fourth quarter of 1998.In the next three quarters there was once again
some promise of a recovery, with manufacturing growth touching close to 10
per cent in the third quarter of 1999. But the downturn returned and
proved to be much longer and sharper, bringing the growth rate down to
close to 2 per cent in the second and third quarter of 2001.The threat of
a recession, even if defined stringently to occur when growth is negative
in consecutive quarters, now seems real.
Chart 4 >>
Charts 5-10 examine these
trends separately for the major use-based industrial categories. It is
clear that, basic goods and intermediate goods display more or less the
same trends as the overall index. The difference really arises in the
capital and consumption goods categories. The capital goods sector appears
to have been through a longish recovery over the eight quarters between
the fourth quarter of 1997 to the fourth quarter of 1999, and then
experienced a collapse, with recent trends pointing to a major recession
afflicting the sector. Consumer durables played a major role in the
recovery in 1999-2000 and still appears to be outperforming most
industrial categories in the most recent quarters. Finally, the consumer
non-durables sector has not been performing well through most of the later
half of the 1990s.
Chart 5 >>
Chart 6 >>
Chart
7 >> Chart 8 >>
Chart 9 >>
Chart 10 >>
A caveat is called for at
this point. It is well known and widely accepted that the reliability of
the IIP declines when we move to more disaggregated levels of industry.
Further, there is a substantial degree of overlap between the capital and
consumer non-durable categories. Automobiles, purchases of which for
personal use rose substantially during the 1990s, are included in the
capital goods category. So are electronic goods of certain kinds that
would be more appropriately classified as consumer-durables. This overflow
of consumer durables into the capital goods category makes it difficult to
assess the degree to which any slump or recovery in capital goods is
driven by consumer durables. It also implies that the small weight of
consumer durables in the overall index, does not do full justice to the
importance of this sector from the point of view of industrial growth.
All this is of relevance
when we seek to explain the process of growth and industrial deceleration
during the 1990s. When launching the 1990s reforms, the impression
conveyed by the advocates of reform was that in course of time the "animal
spirits" of private entrepreneurs would respond adequately to the
incentives created by liberalization. Various elements of the
liberalization programme were aimed at facilitating private investment:
the dismantling of government controls on capacity creation, production
and pricing practices of even large firms and groups; improved access to
imported capital equipment, raw materials and intermediates; easier
possibilities of technical and financial collaboration with foreign
entrepreneurs; and disinvestments of public equity to private players. It
was argued that the stimulus to private investment provided by these new
incentives would take Indian industry onto a whole new growth trajectory.
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