Declining Industrial Production

Despite falling inflation, the production from factories has not increased. For the week ended March 28 2009, inflation continued its downward journey, declining to 0.26 per cent, the lowest ever in more than three decades. But, India's factory output, too, fell for the third time in five months in February 2009, as the global slowdown continues to hit hard.

India's industrial production contracted to a record 15-year low growth of negative 1.2 per cent in February 2009 against a growth of 9.5 per cent in the same month in 2008.

The 1.2 per cent annual fall in the industrial output in February was mainly due to lower output in sectors linked to exports but domestic demand is still robust. Sectors showing poor performance are those having export linkages like textiles, leather, and mining. However, the internal demand continues to be robust.

Overall Decline

According to statistics, the manufacturing output, which accounts for the bulk of the weight in the overall Index of Industrial Production (IIP), declined 1.4 per cent in February 2009, against 9.6 per cent growth in the same month in 2008.

While mining output also fell 1.6 per cent, against eight per cent growth in February 2008, electricity generation increased marginally by 0.7 per cent compared with a 9.8-per cent growth during the period under review. But for inflation in the minerals group there was a decline by a whopping 11.8 per cent due to prices of fire clay going down 19 per cent, iron ore 14 per cent, and chromite two per cent.

In a clear signal that the fiscal and monetary stimulus packages announced by the Government and the Reserve Bank of India (RBI) during the fiscal are yet to yield the desired results, the IIP show that all the major categories — manufacturing, mining, consumer non-durables, basic goods and intermediate products — posted negative growth during the month. Going by specific industries, nine out of the 17 segments experienced negative growth, partly on account of a continued slump in overseas demand leading to contraction in exports.

Inflation Factor
Inflation is low due to crisis in demand and crisis of confidence. It is low also due to base effect and gives Reserve Bank of India (RBI) the scope (to lower) policy rates in its annual policy. Although inflation is tending towards zero, the average rate of price rise works out to be 8.4 per cent for the entire 2008-09 against 4.7 per cent in 2007-08. The prices of some food items like tea, sugar and linseed declined but the overall food index registered an increase of 0.3 per cent in the week under review. Prices of some food items like tea have declined. But the fuel index remained unchanged at its previous week's level of 320.9.

Dashing hopes of an early recovery from the slowdown in the wake of the global financial crisis, industrial production shrank yet again in February to post a 15-year record negative growth of 1.2 per cent, despite signals of a turnaround in certain select segments of the industry such as auto, cement and steel.

With the minus 1.2 per cent growth in February 2009, the overall industrial growth during the 11 months of 2008-09 worked out to a mere 2.8 per cent as compared to a healthy 8.8 per cent increase witnessed in the same period in 2008.

Role of Corporate Investment
This slowdown is likely to be worse than what was experienced from 1997 to 2002; it is starting to look like the early 1990s. An important element of the story is private corporate investment, which was 16 per cent of Gross Domestic Product (GDP) in 2007-08. If this drops significantly, then the economic outlook will turn even gloomier. Conversely, if private corporate investment does well, this could lead to a resurgence.

There are two experiences in the past of a policy-driven resurgence in private corporate investment: these are the reforms of the early 1990s, led by Narasimha Rao, and the reforms from 1999 to 2002, led by Atal Behari Vajpayee. In both these cases, long-standing cynicism about India’s ability to reconsider entrenched wisdom was proved wrong by far-reaching economic reforms which put the economy on the path to prosperity.

Overall demand also shows sectoral divergences. If there are fewer takers for commodities ranging from toothpaste to ores, there's been an uptrend for auto, steel and cement, the last two thanks to building activity in rural and semi-urban segments. Industry insiders say passenger car sales are up and commercial vehicles could see better times in 2009. Auto vending and production of critical industrial inputs are important economic tick marks.