Industry to grow 2% or less this year- Assocham

Growth prospects for India’s industrial production look quite weak and the output may show less than two per cent expansion in the current financial year, an ASSOCHAM study has indicated.

The not-so-bright outlook for the industrial growth has been projected despite the fact that there are visible signs of improvement in the business confidence in the last two months due to several bold policy initiatives by the government.

However, as the chamber said in its previous study, there would be a lag between the improvement in the business confidence and the conversion into the growth pick-up.

“In any case, it is not only the business confidence but also the consumer confidence all through the world, which is at low ebb and that is a real area of concern,” said ASSOCHAM President Rajkumar N Dhoot.

The prediction comes close on the heels of several agencies lowering their 2012 GDP growth targets for India to about 5.5% from 6-7% earlier.

The International Monetary Fund (IMF) on Tuesday cut its projection of India’s economic growth this year from 6.2 per cent to 4.9 per cent, well below the 7.6% growth projected in this year’s budget by the government.

That said, industry forms only about a quarter of India’s overall gross domestic product (GDP). Agriculture contributes about 17.2% and the services sector, including transport, education, hotels etc. contributes 56.4%. Both industry and agriculture – which has been hit by a weak monsoon – will act as a drag on economic growth this year, experts have said.

Within industry, manufacturing, the main stay of the overall Index of Industrial Production (IIP), remains in a quite a bad shape and so are the other critical sectors such as capital goods, durables and non-durables.

The IIP grew by 2.6 per cent in the financial year of 2011-12 and most of its slowdown had come from third and the fourth quarters. The IIP had grown by a healthy 6.1 per cent in the first quarter of the previous year, whereas it has dropped to minus 0.1 per cent in the April-July period of the current fiscal.

Looking forward, the pressure on the manufacturing, capital goods and durables will only remain mainly from high raw material cost, prolonged slowdown and recession in several parts of the world, high interest rates and low consumer confidence, Assocham said.

“The problem for the consumer confidence also stems from the fact that he is not sure about the future and has the lurking fear of difficult times ahead. The chamber fears that the hiring in the industry would slow down, annual pay rises may not take place and in some cases, there could be job losses as well,” it said.

It also said the government has been doing quite a bit in the past couple of months trying to send a positive signals through decisive measures – be it foreign direct investment in multi-brand retail, clarity on retrospective tax laws, IPO reforms and intentions to go ahead with hiking and allowing FDI in insurance and pension sector respectively.

It cut subsidies for diesel and allowed foreign investment in India’s retail sector over the last several days – leading to a rally in the stock market, and an overall uplift in economic sentiment.

The industry has been calling for a cut in interest rates. However, lower interest rates would increase money supply and thereby raise the prices of essential commodities like food. The IMF too recently warned against cutting interest rates. It warned that since inflation was still high, the rates should be maintained until a sustained decrease in inflation was recorded.

Assocham, however, reiterated the demand for cheaper loans.

“As we have been maintaining that it is time for the Reserve Bank of India to take a calculated risk. In any case if there has to be a trade-off between inflation and job-saving, the employment must get a priority. The problem arises from the fact that the growth is mistaken as some kind of abstract economic phenomenon. However, we in the industry see it clearly a factor which creates or destroys employment. We cannot afford job losses as a country. Instead, we need to add as many jobs as possible even in the worst of global slowdown,” Dhoot said.

He said it is fine for the RBI to advise the government to control its fiscal deficit and then control inflation so that in the long-term sustainable growth can be achieved. “The problem is that we are no more in a situation where we can bother about the long-term. We need short-term and quick solutions because the headwinds from the rest of the world are quite strong. First we must ensure growth and then bother about sustaining it. How do we sustain growth if it is not there and the numbers come in the negative, quarter and month after month?”

The Reserve Bank has consistently refused to heed the demands for cheap money, worrying about inflation that is in the double digits.

The ASSOCHAM study said the consumer demand has to be built in sectors such as automobiles, durables and housing so that he starts spending again.

For reviving exports, the industry and the government would do well to sit together and find innovate ways to find new markets largely in Asia which is still growing. Besides, the trade imbalance with China has to be corrected so that Indian exporters get access to a big market there.