Is Indian industry slipping into recession?

By D.H.Pai Panandiker, President RPG Foundation

There are certainly apprehensions. The Advisory Council to Prime Minister had warned earlier that industrial recession is likely and recent signals only support that view.

Not that recession is inevitable. If right measures are taken at the right time industry should be able to bounce back.

Industrial production in September was up 4.9 per cent. That certainly is improvement over the 1.4 per cent growth in August.

What is of concern is that 9 out of 17 industrial groups had negative growth. They constitute a third of the industrial sector.

Whether the improvement in September will continue in future months is doubtful because there are other signals that are blinking red.

Look at exports. They were down 15 per cent in October after a mere 10 per cent increase in September. Many export industries like textiles, leather products, gems and jewellery have been hard hit and forced to retrench workers.

Exports take up about 12 per cent of the industrial production. As such a drop of 15 per cent in exports equals to a drop of 1.8 per cent in industrial growth.

Look at tax collections. Excise duty is the most relevant and collections from that declined 8.7 per cent in October after 3.8 per cent decline in September.

Excise collections have not always been commensurate with the growth of industrial production. Nevertheless, the fall in collections is ominous.

Look at corporate balance sheets. Forty one per cent of the companies announcing their July-Sept results registered a fall in profits mainly because of the 40 per cent increase in interest payments, apart from almost a rise in the cost of raw materials.

Naturally, the advance corporate tax collections shrank; so also retained earnings which fund new investment.

Why has industry been exposed to such cold winds?

There are three main reasons.

First, inflation diverted a larger part of the consumer expenditure to food articles. That reduced demand for industrial goods.

Second, the increase in interest rate sharply raised the EMI in respect of house loans and consumer credit. Construction activity nearly stopped; production of cars dipped 6.6 per cent and of commercial vehicles 35.9 per cent in October.

Third, exports shrank but may revive a little if the rupee remains depreciated.

Currently, growth in both investment and consumption is depressed and hits precisely the industrial sector.

If no decisive action is taken soon, industry is quite likely to slip into recession. What is required is a resurgence of demand.

Pump priming is one way out.

But that may not work because investment by Government takes time. The decision making process is slow and implementation of decisions even slower.

A better option is for the Government to cut excise duties and for the Reserve Bank of India (RBI) to reduce CRR and repo rate. These measures will instantly increase demand and help industry to bounce back without any loss of employment.

(You can e-mail Dinker H. Pai Panandiker at: dpanandiker@hotmail.com. The views and opinions expressed are the writer’s own and not those of Reuters. The article above is not intended to be a financial advisory. Readers must seek specific advice from experts before making investment decisions.)