The Telegraph
Since 1st March, 1999
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- Manufacturing is set to grow rapidly

The gross domestic product growth in the last decade or more has been driven in India by growth in services and industry. In its latest issue of Money and Finance, the Indian Credit Rating Agency bulletin, the point is made that “if we factor out the volatility introduced by agriculture into the expansion of overall GDP” in the last 10 years, then contemporary economic growth is in the range of 6 to 6.5 per cent, most of which is coming from the expansion of economic activity in the non-agricultural sectors that are growing at 7 per cent and even faster. The services sector has shown higher and steadier growth with growth in two years at between 6 and 7 per cent, four between 7 and 8 per cent, two between 8 and 9 per cent and three years above 9 per cent.

Industry has been growing more slowly and is more volatile, with two years showing growth at between 3 and 4 per cent, one between 4 and 5 per cent, two between 5 and 6 per cent, three between 6 and 7 per cent, one above 7 per cent and two above 10 per cent. The years 1998 to 1999 were poor years for industry. Revival in 2000 and 2001 was pushed back with the war fears in 2002. The last two years (2003 and 2004) have seen growth of 6.4 and 6.5 per cent.

Industry growth includes manufacturing in registered and unregistered enterprises as well as in infrastructure and other sectors. Manufacturing declined to 1.5 and 2.5 per cent in 1998 and 1999, revived to 4.4 and 7.1 per cent in 2000 and 2001, to fall to 3.7 in 2002, while the last two years were 6.2 and 7.1 per cent respectively, still only half the 12 and 14.9 per cent of 1995 and 1996.

Data is available about fixed investment, that is, building of new assets in the public sector, private sector and households. The last would include unincorporated businesses, including small scale, cottage and tiny enterprises, a sizeable part of manufacturing in India. Little information is available regularly about this large part of the economy on an annual basis. For example, there is a census of small-scale industry every five years and figures in between are only projections based on the last census.

Asset creation in the public sector figures between 1997 and 2003 was erratic, negative in 1997-98 and 2001-02, with the other years varying from 9.4, 2.7, 2.0 and 9.8 respectively. Average annual fixed asset creation was — 2.4 per cent between 1997 and 2003 in the private corporate sector while for the household (including private unincorporated enterprises) it was 16.4 per cent. In the earlier period from 1993-94 to 1996-97, the figures were an average fixed investment of 25.8 per cent in the private corporate sector and 8 per cent in the household sector.

The early years of reforms, especially from 1994 to 1997, saw high investments in the larger companies in the private corporate sector. The liberalization of the Nineties, lowering of import duties, opening of the market to domestic and foreign competition, removal of controls, led to companies increasing capacity, modernizing technology, investing to improve productivity, building new plants, and all this was reflected in their fixed investment.

However, market demand did not improve at the same rate and many found that they had expanded by too much, borrowed more than they could service and, far from becoming competitive, had little resources to compete with in the marketplace. From 1998, the private corporate sector was restructuring capital and borrowings, improving business focus, reducing numbers of employees, improving productivity and working capital management, not investing in more fixed investment.

These were also the years in which the equity markets has lost confidence in corporate equity after the huge losses in market values due to insider trading and blatant price rigging. Companies could not raise new capital and hence also could not borrow more. Those companies that had the resources to invest were instead doing the things that would improve margins. Unincorporated enterprises did not have this option and in any case had not gone on the fixed investment spree that the corporate sector had. Hence investment in such enterprises increased, after an initial lag.

We are now at the beginning of the second wave of investment in fixed assets. But this time companies have learnt from the earlier experience. Investment is not only in fixed equipment. It is also in methods to improve quality and productivity. It is in automation, information technology and improved manufacturing processes. Companies have learnt to make more with less materials. A quality improvement movement is beginning to affect a second rung of enterprises. Oracle, Six Sigma, and other new process improvement technologies are sweeping this second rung and other companies will have to follow if they are to survive.

Industrial growth also sees activity on new fronts. For example, the building blocks of manufacturing have shown high growth: steel production has risen by 53 per cent in the last five years and aluminium by 51 per cent. Readymade garments grew by 44 per cent and will rise even faster with the dereservation to small scale two years ago, the diversion of many buyers to India from China during the SARS epidemic and the abolition of the multi fibre agreement next year. The Indian garments industry today is much more competitive than two years ago.

The automobile industry has reached a level of production that makes it a driver of growth. Production of cars rose in five years by 94 per cent, commercial vehicles by almost 100 per cent and of two-wheelers by 66 per cent. The petroleum industry is in an expansion mode with new LNG terminals being built, pipelines, refineries, petrochemical plants and the like. The explosion in telecommunications has meant not merely growth in instruments, but also in the manufacture and laying of cables and the other infrastructure. The power sector is gearing up for very significant expansion after the passage of the Electricity Act 2003.

Automation is another major area of growth as retail stores are set up, new techniques in petroleum marketing are introduced and companies in all sectors seek to improve productivity and quality. With all this, the growth in manufacturing has risen, but only to about 7 per cent. We can expect acceleration in the coming months as India becomes more integrated into the global economy and the rural markets begin to show improving demand. This time the growth will be more labour and skills intensive, being related to process improvement and not merely to expansion.

The strengthening rupee will lead to greater import of equipment (as is happening). Domestic capital goods show lower growth. The low interest rates in the United States of America will also stimulate considerable import of capital goods. Expansion of capacities, productivity and cost improvements, better design and quality of products will be some of the consequences of industry reaction to competition and opening up. Indian companies that are now venturing gingerly into overseas ventures (either new or through acquisition) will grow in number.

Demand also shows significant improvement. This time it is not merely driven by more purchasing power. It is helped by easily available bank credit. The National Council of Applied Economic Research household expenditure surveys show a rising proportion of purchases of consumer durables financed by credit. Bank lending for purchase of goods by households has been a fast growing portion of their loans portfolio. Banks are now getting ready to enter rural markets with similar offers for rural consumers.

The short-lived boom in manufacturing in 1994-96 was sabotaged by many fraudulent public issues, high interest rates, high duties, inadequate demand growth, and poor attention to productivity and cost improvement. All of them have now changed for the better. We can expect a sustained improvement in manufacturing. It is to be hoped that there will be a reversal of the dormant share of manufacturing in the GDP and that this share will rise. This is essential if development is to reach the masses and not be confined, as it has largely been, to the upper and urban classes.

Manufacturing is at long last set to grow rapidly, making the structure of the economy more consistent with our low standards of living.

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