Is the worst over?

With news about industrial performance going from bad to worse, there is one obvious question everyone is asking. Is the worst over? Will industry see a revival in 2001-02? If so, how? What will be the engines of growth?

Answers are being sought in what went wrong last year. One, of course, was the drought and the resulting poor performance of agriculture. The decline in consumer demand has, to a large extent, been attributed to the fall in rural incomes.

In addition to rural demand, the last few months have seen a decline in urban spending as well. This has been attributed partly to bad news about the economy and about the IT sector that has induced job uncertainty and partly to the fall in stock prices. The fall in share prices has reduced the financial wealth of the owners of these shares. This creates the "wealth effect" which in other words means that since people are poorer because they have less wealth (and not necessarily less income), they spend less.

The other glaring reality of 2000-01 was low growth in investment. Though actual data for investment has not come in and, in fact, will not come in for a while, the fall in production and import of capital goods is a clear enough indication of the decline in investment demand.

Even though exports witnessed excellent growth they were not able to push demand enough to raise industrial growth beyond 5 per cent. In April- March 2000-01 Index of Industrial Production grew by 4.8 per cent over the previous year.

The decline in aggregate demand has reduced profitable investment opportunities. The threat of imports and an environment of general policy uncertainty added to the lack of desire to invest. The low growth in prices of manufactured products as well as the threat of low priced imports meant that firms were unable to set prices.

Thus poor agriculture, low consumer demand and a decline in investment were the negatives for Indian industry last year. This means that for the slowdown to be overcome this year it is necessary that these factors be different. The expectation that export growth will be lower in the face of a global slowdown makes this all the more necessary.

In other words, we may say that for the revival, the necessary conditions are first, agriculture should do well. Even though agriculture constitutes about 25 per cent of GDP, over 60 per cent of the population of the country is still dependent on agriculture. The linkages both in terms of production and demand are so strong that it is unlikely that industry will not feel the effect of a decline in rural output. Especially when last year has been bad both in terms of output and prices which reduced growth in rural incomes. While it may be true that there is not much one can do about the rains, but in the long run the dependence of agriculture on rainfall must be reduced.

Second, investment demand should increase. The removal of the surcharge on corporate income tax has raised corporate incomes by about Rs 3000 crore but the bulk of this may not be invested unless businesses see profitable investment opportunities. While a traditional solution may be to push them by raising demand for which the government would increase public spending, it is unlikely that this will happen to a considerable extent because of the fiscal constraints being faced by the government. The one thing the government can do without incurring any costs is to provide the private sector with a more stable policy environment. Policy uncertainty has only made the investment scenario worse.

Third, in the face of the global slowdown, exports should be aggressively pushed otherwise the decline in export growth will only further reinforce slower industrial growth. Improvements in infrastructure, marketing, reduction in bureaucratic procedures and a significant exchange rate depreciation are some steps that can help. Also, since industry is likely to demand greater protection a depreciation will be able to provide this protection by raising the cost of imports. This is more within the framework of market oriented reforms rather than raising tariff barriers.

Whether these will prove to be sufficient conditions for industry to start looking up cannot be said. But certainly, while we wait for the monsoon to arrive one hopes good sense will prevail clear policies and strategies will be outlined and implemented to combat the slowdown.