With the release of the provisional Index of Industrial Production (IIP) figures for February 2010, it is clear that Indian industry has bounced back after its indifferent performance in 2008-09. There has been a revival in all three sub-sectors covered by the IIP (Mining and Quarrying, Electricity and Manufacturing), with manufacturing taking the lead. According to the figures, the IIP has risen by 10.1 per cent during the first 11 months (April-February) of 2009-10, as compared with 3.0 per cent during the corresponding period of the previous year. Manufacturing alone grew by 10.5 per cent as compared with 3.1 per cent in the previous year.
The question naturally arises as to which factors were responsible for ensuring this quick turnaround after the slowdown of 2008-09 induced by the global crisis and its fall-out. Clearly, external factors could not have played a role. The export dependence of Indian manufacturing is much less than in most other countries. Further, international trade has hardly bounced back to the same degree. Hence, it is domestic demand which must be responsible for the revival.
One obvious source of such domestic demand is government expenditure, which was indeed stepped up and resulted in part in a sharp increase in the size of central and state budget deficits. What needs be noted, however, is that, though there was a stimulus package that was adopted, much of the actual increase in expenditure was the result of an increase in the salary bill of the government, as a result of the implementation of the Sixth Pay Commission’s recommendations and the payment of the associated arrears. Its impact would, therefore, have been more on the consumption goods industries and industries producing their intermediates. This tendency would have been strengthened by the fact that the government also sought to revive demand by easing the availability and terms of credit provided by the financial system and stimulating credit financed purchases of automobiles.
This skew in the pattern of demand is, however, not immediately visible in the distribution of the revival among two-digit industrial categories. There are only three two-digit manufacturing groups that recorded negative growth during the April-December 2009-10 period: Food products (sectors 20-21) and Jute textiles (25). Taking account of the weight of these categories in the manufacturing index, they would appear to have depressed the growth rate of manufacturing as a whole by just a little more than half a percentage point. Thus in terms of a positive contribution to growth, the manufacturing recovery does seem broad-based and significant. However, a more disaggregated analysis suggests that growth has been concentrated in a few sectors. Five out of 16 two-digit groups that registered positive growth contributed as much as 6.78 percentage points or more than 60 per cent of the aggregate rate of growth in manufacturing of 10.5 per cent.
Three of these consist of industries producing “Machinery and Equipment other than Transport Equipment” (35-36) and “Transport Equipment and Parts” (37). Accounting for 3.75 percentage points of the total growth in manufacturing, the growth of these sectors has lead to the conclusion that the revival is substantially on account of a turnaround in the capital goods sector led by investment demand. This ignores the fact that these two sectors while incorporating industries producing durables, include in their ambit a number of “consumer durables”. Thus the two-digit sectors 35-36 include Manufacture of typewriters, Manufacture of domestic airconditioners, Manufacture of domestic appliances, Manufacture of television receivers, tape and CD recorders, video playback equipment and radio receivers, and Manufacture of telephone instruments including cell phones, besides personal computers which are increasingly in the nature of consumer durables. In addition, Transport equipment includes passenger cars that in today’s world are not only investment goods but substantially also consumer durables. Thus, the revival in these sectors can be led substantially by consumption demand driven by improved incomes, the windfall benefits of arrear payments and access to credit.
The conflation of the effects of investment and consumption demand on growth implicit in figures on movements in output at the two digit level is partly resolved by the use-based indices of industrial production. In this classification items like typewriters, household appliances, domestic refrigerators, telephone instruments, television receivers, tape recorders, motor cycles and passenger cars (but not personal computers) are taken out of capital goods and included in the consumer durables category. When this is done we find that during April-February 2009-10, both Capital Goods and Consumer Durables contributed to the growth in manufacturing production with the contribution of each of them being a similar 1.7 and 1.6 percentage points respectively.
Besides the two-digit groups 35-37, the other sectors contributing to the industrial expansion are Numbers 30 (Basic Chemicals & Chemical Products (except products of Petroleum & Coal) and 31 (Rubber, Plastic, Petroleum and Coal Products). These chemical industries are also a heterogeneous lot and include a number of consumption goods or inputs for consumption goods production varying from cosmetics and toiletry, to drugs and pharmaceuticals and synthetic fibres. The growth in these two-digit sectors, therefore, would have also been driven by increased consumption demand.
In sum, consumption expenditure appears to have played an important role in driving the industrial recovery, though this would in due course have stimulated investment. Since the windfall gains from the Sixth Pay Commission are once-for-all in nature and credit financed consumption need not be sustained if monetary policy is tightened or the fear of default increases, the dramatic recovery in manufacturing could lose steam rather quickly, unless alternative ways of sustaining such demand is ensured.