Keys to fast growth lie in two sectors

Tags: News
Prime minister Narendra Modi’s economy managers would be looking for a magic bullets to get the economy fire on all cylinders quickly. All they need to do is spot the laggards and give them some steroids.

Recent official statistics on industrial production may have painted a rather bleak picture for the economy, but a breakup of the latest index of industrial production (IIP) shows several heavyweight sectors are actually growing, while few others — mainly light-weight sectors — have contracted. Quickly targeting these laggard sectors can hasten a turnaround.

A sectoral analysis of the IIP data reveals basic goods, consumer non-durables and intermediate goods — which collectively weigh around 83 per cent in the industrial output index — did register positive annual growth rates of 2-6 per cent in the financial year ended on March 31.

Industries that dragged the index were consumer durables and capital goods, each weighing around 8.5 per cent in IIP, the index that measures industrial output.

A comparison of the average of monthly IIP levels in FY14 with the corresponding averages for FY13 showed consumer durables production fell by 12.2 per cent in FY14 and capital goods output by 3.4 per cent. India registered flat growth in annual factory output in FY14, down by a marginal 0.1 per cent.

Basic goods, which have the maximum weight of 45.7 per cent in IIP, grew 2.0 per cent in FY14. That was pretty slow and something that the new government will have to sit up and take note. Fuel, fertilisers, cement, metals and electricity are the major components of the basic goods category, whose production is vital for the economy as they drive manufacturing and agriculture. This segment weighs 8.5 per cent in the overall IIP.

The last time the basic goods sector performed so badly was in FY09, when it grew just 1.7 per cent after clocking 9 per cent growth for two successive years in FY07 and FY08.

Output of this category picked up to 4.8 per cent in financial year 2010 and 6.0 per cent in financial year 2011, only to decline to 5.5 per cent and 2.5 per cent in financial year 2012 and financial year 2013,

respectively.

Yet that is not what’s hurting industrial production so badly. The biggest drag has been the consumer durables sector, which saw an unprecedented 12.2 per cent contraction in production in financial year 2014.

This sector clocked outstanding growth of 25 per cent in financial year 2007 and 33 per cent in financial year 2008.

It grew slower next year due to the global financial crisis, but still logged 11.1 per cent expansion, and then rose to 17 per cent in FY10 and 14 per cent in FY11.

Thereafter, the growth in consumer durables output dropped sharply to 3 per cent in FY12 and 2 per cent in FY13, before contracting 12.2 per cent in FY14. That was like the last nail in the coffin.

Whether the new government can focus on consumer durables remains to be seen, but a turnaround in this sector can immediately lift factory output.

Intermediate goods or raw materials, which weigh 15.7 per cent in the IIP, grew 3.0 per cent in FY14 compared with 1.6 per cent expansion in FY13 and 0.6 per cent contraction in FY12.

But for the overall IIP to improve significantly, this segment will need to revert to growth rates of at least 6-7 per cent, last seen in FY10 and FY11.

Now, that’s not an easy task as it may seem.

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