Industrial growth hits slow patch

Lack of investment affects growth across South and Southeast Asia

The February slowdown in industrial growth can signal the beginning of a phase of slower growth in the Indian economy. The problem that seems to be affecting the entire South and Southeast Asian region is a lack of investment.

While there is no dearth of finance, investments do not seem to be picking up. "It could be a soft patch on account of the global uncertainties ... a wait for good news on the international front," said Saumitra Chaudhuri, economic adviser, Icra.

Over the last few months, oil prices have continued to remain high, inflation has not come down, growth rates are falling and growth projections have not been met.

"I am worried by the fact that industrial and infrastructure production is down in February. The government has to take some confidence building measures to encourage investment," Chaudhuri added.

The index of six infrastructure industries "" coal, cement, steel, petroleum products, electricity and crude petroleum "" reported a dip in production in February 2005 as compared with February 2004.

The index of industrial production, a measure of how industry has fared, reported a growth of 4.9 per cent in February, down from 7.5 per cent in January. The figure was, in fact, the lowest in 2004-05.

"At the moment, it appears that industrial growth in 2005-06 will be less than that of 2004-05 and is estimated at 6.7 per cent. But this will heavily depend on external demand," said the Institute of Economic Growth (IEG) in its monthly monitor for April-May 2005.

The problem is two-pronged. Supply constraints in sectors like power, steel and coal, and more worryingly, a drop in output because of demand constraints. Demand for consumer goods is, however, not a problem.

"Machinery and equipment and capital goods, which are close proxys of investment, have reported lower growth. So have the core sectors, chemicals and commercial vehicles sectors," said DK Joshi, senior economist, Crisil.

"Compared with the level of financing available, there is a weakness in investment demand. Ideally, if the demand for machinery is strong and production is down, imports should go up. However, machinery import growth was fairly low at around 10 per cent," Chaudhuri said.

"If industrial growth is in the range of 5.5-6 per cent in March 2005, a serious look will have to be taken," said Joshi.

The news is, however, not all that bad. There are also some indicators that investment is picking up. The incremental credit-deposit ratio is high and corporates have shown good top line and bottom line growth in Q2 and Q3 2004-05.

"There are also strong signals of investments picking up. CMIEs capex reports new investments in the steel sector and an increase in capacity utilisation, among others," Joshi said.

"It is still an investment-led growth, but risk factors need to be watched. Infrastructure should not become a bottleneck, rates of interest need to remain stable, oil prices will need to be watched and of course, the global slowdown, especially in export destination economies can affect our export growth," said Ajit Ranade, economist, Aditya Birla group.

There are also concerns on inflation and on the government's ability to meet its deficit reduction targets.

"Despite the Reserve Bank of India's efforts, it is expected that inflation will cross 6 per cent in the near future," the IEG said, adding that the central bank might not hold the bank rate at its current level of 6 per cent for a long time, given the rising international interest rates and inflationary expectations in the economy.