Chapter 8 of the Economic Survey deals with the performance of the country’s industrial sector. The necessity of the lockdowns meant that industrial activity had to be put on hold which of course led to a slowdown in the sector. The government initiated a number of incentive-linked schemes following the lockdown in order to revive activity in the sector, and keeping with global trends, the industrial sector is set to grow by 11.8% during this fiscal. This would mean that industry’s share in the country’s GVA is expected to increase to 28.2% from 25.9% the year before.
This is the first time in a decade where the industrial sector’s share in the GVA has increased instead of decreasing. Since 2011-12, the sector’s share has steadily fallen from about 33% to 25.9% last year. Some of the recovery is natural, as industrial activity bounced back with strength following a long period of being subdued due to the lockdown. The government’s policies have also played a part, but what it goes it show is that in the preceding years there should have been a similar policy focus on industrial activity in order to help the sector grow. Instead, it has taken a pandemic for the government to respond to the woes of industry.
The Index of Industrial Production (IIP) showed a decline of 15.3% in 2020-21 (April – November) but improved to a positive growth rate of 17.4% during the same period in the following year. While pharmaceuticals have been leading the way in manufacturing as a sub-sector, there has been a positive showing from the textiles and wearing apparel industry as well. Motor vehicles and other transport equipment have also recovered while computers and electronics continued on with their positive trend.
The ICI or the Eight Core Index which tracks the performance of the core industries such as Coal, Crude Oil, Steel, Electricity, etc. also recovered to 13.7% after a -11.1% depression in 2020-21. Steel, cement, natural gas, coal and electricity have been the best performers in this regard. Almost all sub-sectors within this index have recovered to positive growth rates with the exception of crude oil and fertilizers.
Capital formation and credit growth in industry have both shown less than impressive figures. Gross fixed capital formation (GFCF) has declined steadily over the last decade, in line with industry’s overall decline in the share of the country’s GVA. The latest numbers for industry’s share in the country’s GFCF are from 2019-20 where it stood at 30.1%. This is likely to be lower in 2020-21 and 2021-22 as the intake of credit also declined in this period. We have covered in the previous chapters how bank credit growth has primarily been absorbed by the agricultural sector and by those seeking personal loans. Industry and services, on the other hand, have put up very low acceptance rates. Overall bank credit growth as of October 2021 was 4.1% compared to the year before where the growth rate was in the negative zone at -0.7%.
The standout feature of this years Budget has been the focus on increased capital expenditure. The reasoning is that capital expenses tend to have a multiplier effect on the economy which will lead to growth across a number of metrics. The governments focus is going to be on energy, roads, and railways and to achieve this growth they have set aside about $100 billion, a 35% increase from the year before, or just under 3% of the country’s GDP. This massive infrastructure push will create additional demand for raw materials such as steel, coal, etc. which will mean that factories will have to work at a higher capacity. This will in turn have a positive effect on employment and a number of sub-sectors will benefit too.
Most of this years survey has taken on a very optimistic outlook of both the past and the future. This is in contrast to the opinions that outside analysts have. While the government’s efforts have perhaps prevented the economy from plunging into a deep recession, we can not ignore the fact that many millions of people have descended into poverty and many are still unemployed as a direct consequence of the last two years. The focus on infrastructure and therefore industry is one of the right approaches. This, however, needs to be a part of a larger plan for the economy. For example, economists have long been calling for a comprehensive national employment plan. The budget does make allowances for rural employment programmes but it has set aside nothing for those in the urban centers. The infrastructure push is unlikely to help out these workers.
In reality, the infrastructure spending target should be closer to 7%-8% of GDP. As mentioned before, the current amount set aside only amounts to about 3%. The government has been continually criticised for not spending more and relying heavily on credit schemes and incentive-linked schemes, as though to say that they will only help if people try to help themselves first. This sort of approach makes sense during normal times, but during a pandemic, people simply need more assistance. The current plan is also one that focuses on the medium to long term, while the short term issues of falling consumption and household incomes remain unaddressed. One of the concerns raised about the capital expenditure has to do with how the government plans to finance this. It appears as though they will rely heavily on borrowing and taxation. While borrowing is expected, the increased taxation will likely end up affecting the common man as it will be raised through fuel and fertilisers which will drive up prices for the average Indian.
The infrastructure plan will lead to certain positive outcomes. The issue is that these outcomes will still fall short of where the country’s economy ought to be. We have often talked about a holistic developmental approach in our previous writings. This is continues to be absent from the government’s plans. Having said that, it must also be taken into account that the country is still recovering from the pandemic, and as much as we would like to demand, government is still a human enterprise with all the flaws and deficiencies that are associated with being so.