Emitting a robust thrum, is the economy’s engine

NEW DELHI: Indian industry has closed 2005-06 on a solid note, putting economy on track to achieving 8.1% economic growth estimate.

The Index of industrial production (IIP) figures show that industry grew 8% in 2005-06. Though this is a notch lower than the 8.2% growth in 2004-05, it is a creditable performance for that very reason.

The manufacturing sector also slowed down a bit, but 9% growth on the back of a 9.2% growth in 2004-05 isn’t something to scoff at, say economists. Growth has been lower than the previous year for all sectors, but no one is fretting too much. “The figures show a good industrial scenario; growth is balanced across investment and consumer sectors,” says D K Joshi, senior economist at rating agency Crisil.

“The investment boom of 2004-05 has been an important driver for the manufacturing sector,” says S Bhide of the National Council of Applied Economic Research.
But both Crisil and ABN Amro Bank are expecting a more moderate performance in 2006-07 (See box)

The advance estimates for gross domestic product (GDP) growth put out by the Central Statistical Organisation forecast 1% growth for mining and quarrying, 9.4% for manufacturing and 5.4% for electricity, gas and water supply.

Though the growth figures are all slightly less than this (see table), no one is doubting that the 8.1% overall growth estimate will be achieved. For one, IIP measures output while GDP figures reflect value added. Besides, GDP figures include the unorganised sector production, which the IIP doesn’t measure.

What’s dragging industry down is the poor performance of mining and electricity. Mining continues to be pulled down by the petroleum sector with crude oil production falling 5.3% in 2005-06 against a 1.8% growth in 20004-05 and refinery products growing at 2.1%, half of the previous year’s growth.

Though electricity has maintained last year’s momentum, this isn’t enough, argues Siddharth Roy, economic advisor, Tata Services. Production growing at 5% when demand is growing at over 10% doesn’t augur well, he says and warns that future growth of manufacturing will remain a question mark if electricity supply doesn’t improve. 

Within the manufacturing sector, the use-based industries - barring intermediates — all did better than in 2004-05.

All investment related sectors - transport equipment and parts, machinery and equipment, non-metallic mineral products-have logged double digit growth almost through the year, as have consumer products like textiles and beverages, tobacco and related products.

The intermediates sector has logged single digit growth through the year but no one is worrying about this, attributing it to higher imports. “The robust growth of end-use industry would not be possible otherwise,” Joshi points out.

So, 2005-06 has been good. But what of 2006-07? Will the 8% growth of industry for two successive years be sustainable?

Yes, says S Bhide of the National Council of Applied Economic Research.
Others aren’t so sure. Rating agency Crisil and ABN Amro Bank are both predicting a moderation in industrial growth in 2006-07. Crisil estimates industry growing at 7.4% while ABN Amro puts it at 7.5%. “All factors aiding growth have turned negative,” observes ABN Amro’s Abheek Barua.

The reasons they cite are broadly similar - oil price hike and hardening interest rates, a concern Bhide also shares, though he feels the outlook for this year is positive. Bhide feels the price rise alone will not be as much of an issue as how it is managed.

“That will be important both for the short-term and the medium-term.”
Crisil’s D K Joshi feels poor electricity supply will be another factor. “Electricity will be a binding constraint, especially for small and medium units.”

The larger units mostly have their own captive units and while costs will go up, production may not suffer, which it will in the case of the small units, he notes.

The slowdown in the United States could affect industrial growth, feels Barua, since the European Union is not compensating for the drop in demand and Japan is too small a player in India’s export basket to play an offsetting role. Indian currency is still overvalued and this could affect the competitiveness of exports, he notes. Manufacturing growth, he predicts, could come down to 8.5% in 2006-07.