The slowdown in manufacturing, along with low GDP growth, has persisted this financial year. Unlike the global financial crisis of 2008, this time, the fiscal space for a stimulus package hasn’t been available. Moving credibly towards fiscal consolidation to reassure markets and investors was a challenge for the government. RBI has not yet been able to find the confidence to lower interest rates substantially to provide monetary stimulus for growth.
The stimulus package after the 2008 crisis had essentially stimulated consumption demand, which speedily yielded high manufacturing growth rates. As the impact of the fiscal stimulus ended, RBI also raised interest rates steeply. In many major industry segments, this coincided with the completion of the investment cycle in the private sector. Consequently, the manufacturing sector began to experience the downturn of the business cycle, characteristic of free open-market economies. As India doesn’t have export-led growth momentum, it is likely to experience business cycles similar to those in western economies.
This time, the downturn has been accentuated by additional factors. The real exchange rate appreciation India experienced in the last few years vis-à-vis its largest trading partner in goods added to the competitive disadvantage for domestic value addition. New investments in roads fell sharply, owing to new hurdles in the regulatory framework for the environment and forests. Also, new investments in power plants fell sharply because of the sudden rise in coal prices abroad.
A revival would primarily depend on the easing of interest rates by RBI to 2009-10 levels; the industry would like this soon enough. The revival would be strengthened with a competitive exchange rate so that domestic value addition isn’t at a disadvantage. An increase in investments in infrastructure, especially in roads and power plants, would stimulate industrial demand. This should, hopefully, happen soon enough, as identified bottlenecks are removed.
Member secretary, National Manufacturing Competitiveness Council