Abstract : Industrial production grew by a mere 2.4% cent in the April-March period as against an 8.5% growth in the year-ago period.
Compared to sectoral GDP shares, industry got nearly 300% more credit than agriculture, which means that while agriculture is starved of credit industry is splurged with surfeit of credit. Yet, corporates are seeking higher credit flow at lower interest rates.

1. Data released by the Central Statistical Organisation (CSO) ON 12TH April showed that the IIP grew by a mere 2.4 per cent in the April-March period as against an 8.5 per cent growth in the year-ago period. The latest IIP number shows that the effect of stimulus packages did not have any impact. Manufacturing, which has nearly 80 per cent weight in the index, contracted by 3.3 per cent in March 2009 mainly because of fall in output in the food products, leather and textiles sectors. However, a few sectors like beverages, chemicals and transport equipment showed positive growth.

In terms of use-based classification, only two segments — consumer durables and basic goods — were in the positive territory. “Indians are reigning in spending. Falling asset prices, deteriorating labour market conditions and subdued fall in consumer prices are hurting spending by households,” said a note prepared by the Moody’s Economy. Capital goods dipped the most by 8.2 per cent, indicating slowdown in private investment, which has been the main driver of growth for the Indian economy. FMCG output also dipped 3.6 per cent. What is of concern is that some of the basic and core industries such as metal products, and basic metal and alloys, have shown deep deceleration. This reflects a serious demand slowdown, sluggishness in investment activity and a continuous fall in exports.

Industry chambers have expressed concern over the fall in industrial production and waning consumer demand in response to the latest index of industrial production data. They are seeking lower interest rates, increase in lending by the banks and higher infrastructure investments. Lending rates continue to remain fairly high and act as a disincentive for fresh investments and fructification of planned projects, they say. They hope that the effective lending rates of banks would come down further keeping in line with the policy rate cuts already announced by the RBI. This would push investments and bring the consumer back to the market. FICCI. “Ensuring adequate credit availability to industry at reasonable rates is a priority to boost demand and reduce production costs in industry. Rationalisation of taxes and a special incentive package for sectors worst affected by the slowdown is also necessary to stimulate demand,” PHD Chambers of Commerce and Industry. The Associated Chambers of Commerce has warned that it does not foresee any sign’s of recovery for the next two-three months.

3. NOTE: While growth rate of industrial output decreased to 2.4% from 8.5% last year, growth in credit intake however increased to Rs.2.13 lakh crore (Feb09-Y-o-Y) from Rs.1.68 lakh crore last years. Disaggregated data on sectoral deployment of gross bank credit available up to February 27, 2009 showed that 52 percent of incremental non-food credit (y-o-y)was absorbed by industry, compared to 45 per cent in the corresponding period of the previous year. The infrastructure sector alone accounted for 31per cent of the incremental credit to industry as compared with 33 per cent in the corresponding period of the previous year.
Small enterprises (both small industrial and services enterprises), however, were given only 15 per cent of the total incremental non-food credit as compared with 19 per cent in the same period of the previous year. The agricultural sector was given only 13 per cent of the incremental non-food bank credit. The ratio of agricultural credit to agricultural GDP was only 31% as of March 2008 where as the ratio of industrial credit to industrial GDP was a whopping 86%. Compared to sectoral GDP shares, industry got nearly 300% more credit than agriculture, which means that while agriculture is starved of credit industry is splurged with surfeit of credit.

When growth rate of industrial output declined by 70%, why growth rate in credit to industry increased from 45% to 52% instead of decreasing to less than 45%? Monetary authorities should analyse this discrepancy and find out how this increase in credit was utilized by industry when it did not result in any increase in growth rate of output. Meanwhile corporates, taking advantage of the situation are clamouring for more credit at lesser interest even though such measures taken so far did not improve industrial output growth. The Government should question the captains of industry on this discrepancy, instead of bowing down to their demands, as was done in the past. Marginal utility of credit given to industry is steeply decreasing. If  more credit is given to agricultural the marginal utility will be higher as farmers will be released from the clutches of money lenders who charge very high interest and productivity can be enhanced if more agri Investment credit is provided. The new government should ponder over this reality and ensure that credit flow to agriculture sector is enhanced to 18% of the net bank credit.