Monday, July 28, 1997

Demand Recession And Industrial Policy

About six months ago it appeared that Industry was facing a sectoral (Keynsian) growth recession. Data available at the time indicated that industrial production, as measured by the IIP, had grown by 9.5% to 10% during the first half of 1996-97, and was still growing at 10% in October. At the same time there were indications that the large corporate sector was undergoing a slowdown in growth during 1996-97. These included poor demand for bank credit, declining sanctions by Financial Institutions, a fall in non-oil imports, and, company first half year sales results [qualitative results as reported in the media]. I had suggested (in a paper) that this paradox was due to the fact that the large corporate sector was facing a “Keynsian” cyclical recession. Among the factors affecting this segment of industry were the passing of the hump in supply of, demand for, and investment in, higher quality consumer durable goods, including automobiles. Other factors included the lagged affect of the tight money policy in 1995-96, the falling prices and low demand in equity markets, and political uncertainty during and after the elections.
Since then there has been a sharp fall in growth of industrial production (IIP): from 9.7% in the first seven months to 3.2% in the last five months of 1996-97. The slow growth of power production during 1996-97, which seemed to have had relatively little effect on the corporate sector, perhaps because of increased captive generation of power, has clearly affected overall industrial growth. Other factors which have affected overall growth of industry are the fall in agricultural productions & income during 1995-96 and a sharp fall in export growth from November (due both to slowing world imports and real exchange rate appreciation) . All three factors would affect small & medium industry as much as, if not more than, the large corporate sector. Thus what started as a sectoral growth recession appears to have been pushed into a more general growth slowdown during the last five months of 1996-97, because of these additional factors.
The policy actions taken during the first half of 1997 were expected to reverse the growth slowdown. These included decontrol and further reforms relating to the banks and financial system, easing of monetary growth, and the reduction in personal and corporate income tax rates. The recovery of industrial production in April 1997 can be attributed partly to these and other policy measures relating to the infrastructure and industrial sectors. But much more can be done in the areas of de-control and reform of public utilities, both at the central and state levels, to ensure faster recovery.
The sharp recovery of agricultural production in 1996-97 will not only reverse but add to the demand for industrial goods, while easing supply of import controlled goods (artificial non-tradables). Interest rates have declined and credit availability has increased over 1996-97, while stock prices have been buoyant since the beginning of 1997. Actual supply of credit is expected to catch up gradually, among other things through increased credit for investment in the Power and Telecom sectors. One would similarly expect a recovery in the primary market during the rest of the year. International organisations had forecast a recovery of world import growth in 1997, though the extent of this recovery will now depend on the impact of recent developments in ASEAN. Policy can support recovery of Indian exports by moderating the pressure on the rupee to appreciate; This can be done by de-controlling imports, by freeing other current account transactions such as purchase of hedge instruments, and by liberalising capital outflows.

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