Market overview India’s sustainable recovery yet to happen

The IIP (index of industrial production) data recently released by the Central Statistics Office shows that the Indian industry is slowing down in 2015–16. Read on for vital stats along with factors that have contributed significantly to this scenario.

The output of the Indian industry as measured by IIP grew 2.4 per cent during 2015–16 vis-à-vis 2.8 per cent during 2014–15. This followed a growth of -0.1 per cent in 2013–14, 1.1 per cent in 2012–13, 2.9 per cent in 2011–12 and 8.2 per cent in 2010–11.

The manufacturing sector which has weightage of approximately 75 per cent in the IIP decelerated to a growth of 2.0 per cent in 2015–16 from 2.3 per cent in 2014–15. Thus, major contribution to slowdown of 2015–16 came from the manufacturing sector though the electricity generation sector too contributed to the slowdown (Table 1).

Some of the factors that are considered to have contributed significantly to2015–16’s reversal of industrial recovery registered in 2014–15 following three consecutive years of slowdown over 2011–12 to 2013–14 are described below.

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Global economic slowdown

Global economic slowdown has impacted the global demand for Indian industrial products. This has reflected in the export-performance of Indian goods. Exports declined by approximately 15 per cent in 2015–16 as compared to the previous year in terms of the US dollar.

Particularly, slow economic recovery in the Euro area and slowdown in China have impacted India’s exports to those markets. Exports to the Euro area declined by nearly 10 per cent whereas, exports to China shrank by close to 25 per cent. As the Euro area and China constitute approximately 17 per cent and 3.5 per cent of India’s total exports respectively, any substantial decline in exports to those markets is bound to impact the overall exports in the same direction.

Torpid domestic demand

On one hand Indian exports declined substantially, on the other hand imports too declined by approximately 15 per cent in 2015–16 in US dollar terms. The fall in imports reflects moderation in domestic demand, though it is also factored in by the fall in prices of some of the imported goods such as crude and refined petroleum products. Consequently, the total consumption expenditure (PFCE plus GFCE) decelerated to 6.6 per cent in 2015–16 from 7.2 per cent in 2014–15.

High interest rate

Though the Reserve Bank of India (RBI) cut the key policy rate (repo rate) several times over the past few years, leading to current repo rate at 6.5 per cent, its transmission has been insignificant. Consequently, the rate of interest at which banks lend to the customers (consumers or corporates) is still high. Furthermore, the high interest rates encourage individuals to save more instead of spending on consumption. It also discourages them to satisfy their consumption demand by way of credit. Both ways, high interest rates tend to dampen consumption demand.

Sluggish investment

High interest rates as explained above and capacity under-utilization have dampened the investment demand. When the existing capacity is not fully utilized, it gives little incentive to make investment in further capacity addition. Sluggish investment is also borne out by the slowdown in gross fixed capital formation (GFCF) in 2015–16.

Final thoughts

The positive trajectory of the Indian industry traversed during 2014–15 after three consecutive years of slowdown (2011–12, 2012–13, 2013–14) appears to have short-lived as evidenced by the IIP numbers of 2015–16. The following factors can be said to drive the reversal of the upward trajectory.

• The reduction in repo rate (key policy rate) by RBI could not translate into similar reduction in lending rates by the banks leading to still-high interest rates.

• Global economic slowdown particularly slow pace of the Euro area’s economic recovery and slowdown in China impacted the global demand for Indian industrial products.

• It appears that the government’s efforts to rein in the fiscal situation impacted the consumption demand.

• Torpid investment demand caused by capacity under-utilization and high interest rate.

• Slow pace of infrastructure growth impeding the industrial growth.

• Though ease of doing business seems to have improved, the degree of improvement is insignificant, and still a lot remains to be done by the government on this front. According to the World Bank, India improved its ranking from 134 in 2014, but only by 4 points to 130 in 2015.

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