Growth is slowing down inexorably. It is well known that the downward dip was led by industry. The industrial growth rate in 2010-11 was 8.2 per cent. The following year, it came down sharply to 2.9 per cent. In the last three quarters of 2012 it was less than 1 per cent; this financial year will end with virtually no rise in industrial output, and large declines in major industries like steel and vehicles. It is a disastrous situation, and one which calls for the government’s urgent attention. The finance minister did not spend much time on it in his budget speech; but it is necessary for the government to work out what went wrong and how to set it right.
It is worth looking at the relevant chapter of the Economic Survey to get an idea of official thinking. Some of it is superficial. For instance, the industrial slowdown cannot be because of a slowing of corporate sales growth, for the two overlap to a great extent. Credit growth may or may not be responsible, depending on which is the cause and which is the consequence. In the present case, supply of bank credit may have contributed to the industrial slowdown. One indicator of this is the change in the composition of credit to the commercial sector: the share of banks went down slightly. But what is most striking is the drastic fall in profit margins from 8 per cent two years ago to 5-6 per cent in the last few quarters. The other telling indicator is the rise in the share of interest costs; companies have borrowed and taken on heavy interest commitments. That indicates the running down of liquidity, to which lower profits no doubt contributed. So the primary cause is a drastic fall in demand growth, which slowed down sales growth and made manufacturers run short of cash. The worst affected were electronic goods and computer software, which led the previous industrial boom.
The survey looked high and low for some causes to be optimistic, and uncovered a couple. Growth of domestic equipment output had fallen in the last two years in tandem with a rise in machinery imports; both were clearly related. In the last two quarters, growth of imports fell, and fall in domestic output decelerated. And out of the 402 goods whose output the index of industrial production tracks, the output of 182 was lower in July-September 2012 than a year earlier; the number fell to 160 in October-November. And although the Survey avoided drawing any lessons from it, the number of man-days lost in strikes was 1.8 crore in 2010; it fell to 67 lakh in the following year, and 20 lakh in the first 10 months of 2012. All the figures put together by the Survey fail to convey that the slump has ended; but perhaps it will not get worse.