There's no industrial slowdown: Financial Express: 18th February 2008

The latest round of economic panic in the country has been sparked by the thought of a possible onset of an industrial slowdown. Industrial growth looks pale, with a gradual declining single digit number observed over the last couple of months, against double-digit growth rates last year. Naturally, there is clamour to lower interest rates to boost growth. How far is this feeling justified?
There are two issues here. The first is whether these numbers really tell the real story, because statistics are a curious set of numbers that can be tilted to suit the theme. The other is whether or not one needs to pull the panic trigger on this score.
There are basically six indicators to look at in order to analyse whether an industrial slowdown has commenced. Industrial growth is lower, at 9% during the first nine months of the year. It was 11.2% last year. But that double-digit growth rate came on a base of just 8% growth in the equivalent period of 2005. The base year effect is in operation.
The same holds for infrastructure industries, which have shown a growth of 5.7% during this period, compared with 8.9% last year. In 2005-06, growth was just 4.5%. This is a common error made in interpreting numbers, with low and high base years distorting the view.
Second, exports have been buoyant this year, with growth of 22% (manufactured products constitute over 70% of our exports today), which would not have been possible if industry had slowed down. In fact, this performance has also questioned the oft-repeated grievance that a stronger rupee has weighed export-intensive industries down. Here, it must be admitted that while the macro picture disputes this claim, at the micro level, sectors such as textiles have indeed been affected. Clearly, these industries need to become more competitive, as others already have. Non-oil imports, too, have risen by 33%, which is indicative of robust industrial activity. This can be corroborated with the high growth rate in the capital goods segment of 20.2%, which necessitates higher imports of raw materials and intermediates.
The third indicator of industrial progress is bank credit. Growth in bank credit has been lower on a year-to-year basis till January 25, at 22.6%, as against 29.8% last year. However, the base year effect again comes into the picture. In 2005-06, growth was as high as 31%. While data is not available on the distribution of credit, the impressionistic view is that there has been a slowdown in credit growth to the retail segment, especially mortgages, rather than the manufacturing sector. Further, it must be mentioned that industry accounts for not more than 40-45% of total credit, and the rest goes to sectors such as agriculture and services. Also, unchanged interest rates per se have a limited marginal impact on the corporate sector.
Incremental credit during the year has been around Rs 250,000 crore. A 100 basis points change in interest rates could affect total costs by just Rs 2,500 crore, of which only half would be accounted for by industry, which has sales of Rs 25,00,000 crore. The impact would not be more than 0.05% of turnover, which is insignificant.
The fourth indicator is capital market performance. Total capital issues this year (until December) have been higher than that last year by 14%. Business investment this year is likely to be buoyant. Besides, the performance of the secondary market, though admittedly not a perfect barometer of industrial sentiment, remains an uplifting story when viewed on a chart with longer time calibrations.
Further, corporate performance has been robust this year, as the quarterly results continue to indicate. During these three quarters, based on CMIE data, aggregate sales have grown by 19%, 15% and 18%, respectively, while net profits have grown by 15%, 35% and 22%, respectively. The corporate sector is in fine shape.
Lastly, revenue collections have been more than buoyant this year, as admitted by the Finance Minister himself. This could not have been so unless growth in corporate sales, imports and profits were up sharply, since the Budget had punted on such an outcome while making minimal upward revisions in tax rates. The premise was that with lower or unchanged tax rates, collections will rise on a fast growing business base. Corporate tax collections rose by 37% in the first nine months of the year, on top of growth of 55% last year.
Therefore, there do not appear to be any overt signs of an industrial slowdown, and the explanation for this supposition can be summarised under two sets of factors. The first is the high base year effect. The second relates to our self-imposed fallacious belief that growth must always be exponential.
While exponential growth sure sounds good, as it did for the East Asian economies in the 1980s and 1990s, it is hard to maintain in a globalised environment. As long as we do better than the world’s leading economies, it indicates success. Complete decoupling is not possible.