The Threat of an Industrial Recession

 
Jan 22nd 2002

The provisional estimates of the Index of Industrial Production for November 2000 released recently by the CSO suggest that industrial growth during the first eight months of fiscal year 2000-01 (April-November) has fallen to a low of 2.2 per cent from the not-too-creditable 5.7 per cent during the corresponding period of the previous year. If this trend persists, the overall trend rate of growth during the decade 1991-92 to 2000-01, which was the decade of accelerated economic reform, is likely to be worse than during the immediately preceding ten years.
 
As Chart 1 shows, the trend rate of growth during the years 1991/2-1999/2000 was, at 6.7 per cent, exactly the same as during the years 1981/82-1990/91. However, protagonists of reform have argued that 1991-92 was an unusual year of adjustment, and should be ignored when estimating the trend rate. But even during the period 1992-2000, the growth rate was only marginally higher at 7.3 per cent, and is likely to fall significantly for the period 1992-2001, if the annual rate of growth in 2000-2001 remains close to the 2.2 per cent recorded during the first eight month of that years. Thus, in terms of the aggregate rate of industrial growth there appears to be little difference in industrial performance during the 1980s and 1990s.
Chart1 >>
 
It is indeed true that the IIP is only a lead indicator, that in the past has been known not to be too reliable an indicator of actual trends in the registered industrial sector as revealed by output and value added figures from the Annual Survey of Industries (ASI), that become available only after a two year gap. An index capturing movement in production as suggested by inter-temporal production relatives, the reliability of the IIP can be adversely affected by its inadequate coverage and persistent problems of poor response from reporting units. However, it is indeed surprising that during the 1990s the IIP seems to track quite well movements in GDP at factor cost from the industrial sector defined to include Manufacturing, Construction, Electricity, Gas and Water Supply. The latter figure includes production in both registered and unregistered units. While it may be true that the provisional industrial GDP figures for the most recent years are computed using trends suggested by the IIP, pending the release of ASI estimates, the long term correspondence between the two growth series mapped in Chart 2, strengthens the reliability of the trend indicated by the IIP.
Chart 2 >>
 
Further, the growth figures as revealed by the GDP at factor cost in registered manufacturing, which are available separately for 1990-91 to 1994-95 with 1980-81 as base and for 1994-95 to 1998-99 with 1993-94 as base, point to a similar trend in the IIP over time, though the figures using base 1993-94 yield much higher growth rates than both the older National Accounts Series and the IIP.
 
Overall it appears that during the 1990s the IIP does provide a reasonable guide to industrial trends despite its many shortcomings. Using the IIP therefore, we could argue that after falling sharply in 1991-92 as a result of the import compression and stabilisation resorted to by the government in response to the balance of payments crisis, industrial growth recovered quite well, rising to 5.6 per cent in 1993-94, 9.1 per cent in 1994-95 and 12.3 per cent in 1995-96. After that, however, the industrial sector has witnessed a downturn, with the rate of growth falling to 6.1 and 6.7 per cent in 1996-97 and 1997-98 and slipping further to 4.1 per cent in 1998-99. There were signs of a recovery in 1999-2000 with the rate rising to 6.5 per cent, but subsequently the pace of growth has slackened substantially, standing at just 2.2 per cent during the first eight months of fiscal 2000-01. What is more, the figures on GDP at factor cost for the industrial sector as a whole (registered and unregistered units in
Manufacturing, Construction, Electricity, Gas and Water Supply) suggest that the decline in the growth rate in 1997-98 and 1998-99 was even sharper than suggested by the IIP for those years.
Chart 3 >>

In sum, the trend growth rate in the IIP for the 1990s as a whole, is not just lower than what was seen during the 1980s, but conceals two periods of sharply divergent trends: a period of recovery and growth during the first half of the 1990s, followed by a period of slump during the second half of the 1990s, which has recently been aggravated, after a brief promise of a possible return to growth. If the trend of the second half of the 1990s persists into the first half of the first decade of the new century, we can expect that the economy would be soon afflicted by a severe industrial recession.
 
Chart 4 takes a closer look at the years of the down turn, by examining quarterly growth trends (relative to the corresponding quarter of the previous year) in the general index as well as manufacturing IIP for the period stretching between the second quarter of 1995 and the third quarter of 2001. The picture here is more complex. From a peak of close to 15 per cent in manufacturing and just below 14 per cent in the case of the general index, growth slumped to a low of less than 3 per cent in the first quarter of 1997. This was followed by a recovery that lasted three quarters, which took manufacturing growth to 9 per cent. But the recovery proved short-lived and Indian industry once again experienced a slump till the fourth quarter of 1998.In the next three quarters there was once again some promise of a recovery, with manufacturing growth touching close to 10 per cent in the third quarter of 1999. But the downturn returned and proved to be much longer and sharper, bringing the growth rate down to close to 2 per cent in the second and third quarter of 2001.The threat of a recession, even if defined stringently to occur when growth is negative in consecutive quarters, now seems real.
Chart 4 >>
 
Charts 5-10 examine these trends separately for the major use-based industrial categories. It is clear that, basic goods and intermediate goods display more or less the same trends as the overall index. The difference really arises in the capital and consumption goods categories. The capital goods sector appears to have been through a longish recovery over the eight quarters between the fourth quarter of 1997 to the fourth quarter of 1999, and then experienced a collapse, with recent trends pointing to a major recession afflicting the sector. Consumer durables played a major role in the recovery in 1999-2000 and still appears to be outperforming most industrial categories in the most recent quarters. Finally, the consumer non-durables sector has not been performing well through most of the later half of the 1990s.
Chart 5 >>  Chart 6 >> Chart 7 >> Chart 8 >>
Chart 9 >>  Chart 10 >>
 
A caveat is called for at this point. It is well known and widely accepted that the reliability of the IIP declines when we move to more disaggregated levels of industry. Further, there is a substantial degree of overlap between the capital and consumer non-durable categories. Automobiles, purchases of which for personal use rose substantially during the 1990s, are included in the capital goods category. So are electronic goods of certain kinds that would be more appropriately classified as consumer-durables. This overflow of consumer durables into the capital goods category makes it difficult to assess the degree to which any slump or recovery in capital goods is driven by consumer durables. It also implies that the small weight of consumer durables in the overall index, does not do full justice to the importance of this sector from the point of view of industrial growth.
 
All this is of relevance when we seek to explain the process of growth and industrial deceleration during the 1990s. When launching the 1990s reforms, the impression conveyed by the advocates of reform was that in course of time the "animal spirits" of private entrepreneurs would respond adequately to the incentives created by liberalization. Various elements of the liberalization programme were aimed at facilitating private investment: the dismantling of government controls on capacity creation, production and pricing practices of even large firms and groups; improved access to imported capital equipment, raw materials and intermediates; easier possibilities of technical and financial collaboration with foreign entrepreneurs; and disinvestments of public equity to private players. It was argued that the stimulus to private investment provided by these new incentives would take Indian industry onto a whole new growth trajectory.

 
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