The Telegraph
Since 1st March, 1999
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The prognosis for economic recovery in 2003-04 is contingent on global demand, the fallout of a war with Iraq and the likelihood of internal reform. If recovery in 2003-04 is to be meaningful and not simply an incremental improvement from 5.5 per cent to 6 per cent, industrial performance must improve. No country in the world has developed on the basis of services alone, and hype over services cannot replace industry or manufacturing. Compared to many other developing countries, an industrial contribution of 25 per cent to gross domestic product is low. The slowdown since 1997 is largely attributable to the slowdown in industry and historically, service sector growth has also been closely linked to industrial performance. While a healthy growth in exports augurs well for industry, there are still question marks over the lack of investments. Although real interest rates are still high, they have declined and lack of investments must be explained by negative sentiments, linked to non-reform. Hence, what does one make of the month-on-month industrial growth of 6.2 per cent in October and the overall 5.5 per cent growth from April to October' Although a far cry from the plus 10 per cent witnessed in 1995-96, does this warrant a belief in a sustained recovery, as many analysts and chambers of commerce seem to think' There are reasons for caveats, apart from the point about investments.

Despite core infrastructure sectors like steel and cement having done well thanks to spurts in housing and highway construction, manufacturing growth is still narrowly based. For example, from April to October, consumer durables registered a negative growth of 5.9 per cent. The effects of lower prices and easy finance were more than neutralized by reduced real income, thanks to agricultural performance being affected by drought, lacklustre stock market performance and lower real interest rates. If manufacturing performed reasonably well, that was because of the performance of consumer non-durables. Month-on-month, these increased by 25.2 per cent in October, the sharpest growth in several years. If the lagged effect of lower agricultural incomes takes longer to work out for fast moving consumer goods, there is no reason to presume a continuation of such higher growth rates. Nor is there any obvious reason why slackening growth in FMCGs should be compensated for by an improvement in consumer durables, despite the Keynesian multiplier effect of state-level elections operating in some limited sectors or increased sales of television sets, thanks to the cricket world cup. Housing and highway construction seem to be the only permanent phenomenon. This is not to suggest that industrial performance in 2003-04 will be dismal. But neither will it be spectacular and a GDP growth of 6 per cent is more likely than the spectacular target of 8 per cent.

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