ECONOMIC SURVEY 2008-09

Though the growth of the industrial sector started to slowdown in the first half of 2007-08, the overall growth during the year remained as high as 8.5 per cent. The industrial sector witnessed a sharp slowdown during 2008-09 as a consequences of successive shocks, the most important being the knock-on effects of the global financial crisis. The pace of slowdown accelerated in the second half of 2008-09 with the sudden worsening of the international financial situation and the global economic outlook. The year 2008-09 thus closed with the industrial growth at only 2.4 per cent as per the Index of Industrial Production.

The slowdown in manufacturing over successive quarters started from Q1 of 2007-08. This was more or less replicated by the mining sector and closely followed by electricity. However, in the third quarter of 2008-09, the manufacturing sector witnessed a sharp drop in growth which turned negative in the fourth quarter. Growth of the mining sector declined over successive quarters of 2008-09 to reach a zero rate in the fourth quarter.

The increase in the price of imported crude was passed on into the domestic market in June 2008, but, in a very limited way through a hike in the price of motor spirit, HSD and LPG. However, the persistent rise in the price of crude had started to impact petro-based industrial inputs adding to fuel costs. That apart, the rise in the price of other commodities, particularly metals and ores from the latter half of 2006-07 to the second half of 2008-09 also had its effect on the cost side of the manufacturing sector.

Growth in production of capital goods continued at a robust pace reflecting perhaps the high investment rates. However, with the decline in the growth of intermediate goods (with a weight of 26.5 per cent) from Q 1 of 2008-09, the growth in overall Iip showed a sharp dip that got accentuated in Q3 of 2008-09 when the remaining groups also showed a sharp drop in growth.

The broad growth correspondence between the two-digit level industrial groups and the use-based industry groups can be established by juxtaposing the former against the latter. The growth in consumer non-durables has been boosted by the high growth in beverages and tobacco products, while the other major components-food products, chemicals and leather products showed sluggish/negative growth. The growth in basic goods is closely aligned to that in electricity and mining that constitute substantial part of the weight of basic goods; the most of the rest are chemical products, rubber, plastic and petroleum products and steel. Intermediate goods are a more dispersed group dominated by chemical, textile, rubber, metal product intermediates, most of which experienced negative growth in 2008-09. While the high growth of machinery and equipments bolstered the growth of capital goods, the poor to average performance of transport equipments dampened the overall growth of capital goods.

The growth in any industrial group is determined by the level of production during the current period and the base level. A simple classification of IIP groups in terms of their growth rates reveals that only two out of 17 industrial groups-beverages and tobacco and machinery-grew at robust rates during 2008-09 despite a high base. Seven of the 17 groups showed low growth ranging between 5 per cent to Nil. Of these, three groups (miscellaneous manufacturing, basic metals and alloys and chemicals and chemical products) had a high base in the previous year. Of the eight industrial gro8ups that witnessed a decline in production during 2008-09, the high base factor was significant only for three items- leather products, wood products and jute textiles. In general, it can therefore be said that 2008-09 was characterized by a decline in growth largely on account of a slowdown rather than due to a high base in the previous year 2007-08.

India ranks as the fifth largest producer of steel in the world. The crude steel production grew at an annual rate of 9.2 per cent during 2003-04 to 2007-08. The increase in production came on the back of capacity expansion, mainly in the private sector plants, and higher utilization rates.

Metal products industry suffered from the second consecutive year of decline; its index of production declined by 5.6 per cent in 2007-08 and further by 4 per cent in 2008-09.

The machinery sector (except the transport equipment) grew at 8.7 per cent during 2008-09, on the top of five consecutive years of growth in excess of 10 per cent. In terms of contribution to the growth of the sector, the bulk was accounted for by insulated cables and wires, the production of which more than doubles, as per IIP during 2008-09. The other important items that recorded significant growth during the year included TV receivers, diesel engines, industrial machinery, turbines, hydraulic machines and cylinders, boilers, power-drivern pumps, electric generators, cooling towers, cutting tools and dumpers.

The year 2007-08 was marked by substantial growth in the revenue of IT-ITeS industry, BPO, software and services exports and software and services employment. However, the expected growth in 2008-09 is significantly lower when compared to 2007-08.

Production of the automotive industry grew at a CAGR of 11.5 per cent over last five years. The industry has a strong multiplier effect on the economy due to its deep forward and backward linkages with several key segments of the economy.

There are positive signs that the Indian industry may have weathered the most severe part of the shock and is now moving towards a recovery. Some of the positive signs are the recent upturn in the generation of electricity, the improvement of cement dispatches and rise in the offtake of bank credit.

India has a large domestic market with immense absorptive capacity for industrial goods as also inputs for the development of the infrastructure implies that the demand side provides scope for expansion. At this juncture, when the prospect for industrial output and prices in most industrial economies seem to be grim, the configuration of prices, output and market size makes the Indian industry one of the few attractive destinations for investment, the Survey adds.