Originally Published 2011-09-23 00:00:00 Published on Sep 23, 2011
The combination of high food inflation, general inflation and lack of sufficient job opportunities due to slow growth in the manufacturing sector can spell disaster for a highly populated country like India.
Effects of globalisation: Inflation and slow industrial growth
SOME time ago Finance Minister Pranab Mukherjee was visibly happy at the pace of industrial growth, which was up at 8.8 per cent for the month of June. The industrial sector comprises 25 per cent of the total production in the country and is the key driver of GDP growth. If industrial growth slackens in a significant manner then the GDP increase will also falter, whereas high industrial growth in the next few months may guarantee an 8 or 9 per cent rise in the GDP. The industrial slowdown in July to 3.3 per cent has clearly disappointed the government. Growth of the manufacturing sector in particular has slowed down considerably to 2.3 per cent. Inflation is contributing in small measure to the slowdown of industrial growth because the input costs of manufacturing companies are going up. And, on the other hand, demand is slowing down due to less money in the pockets of the ordinary people after meeting their high food and fuel bill.

Many of the problems that we are facing today are also due to the fact that India has got globalised and is closely linked with Western markets. If the US and the European Union are undergoing an economic slowdown, IT software, textiles, garments, handicrafts, leather products, gems and jewellery exports will suffer a setback. Exports, however, grew by 82 per cent in July but have slipped in August to 44 per cent. Around 60 per cent of India's software exports are going to the US, amounting to $59 billion. A slowdown in the US demand will cause job losses in our IT industry and this will have an impact on the consumer goods market because the young, highly paid IT sector employees have been important buyers of consumer goods and luxury goods. They have boosted the real estate sector also.

There is clear evidence that the US economy is facing a pale economic recovery combined with a high unemployment rate and the EU zone is battling an economic crisis due to Greece's debt problem and the possibility of a default. The impact of the US and EU economic slowdown is already being felt in the real estate sector. This is relating to a slowdown in the demand for office space and residential apartments by multinational companies, which contributed to the real estate boom in the past. Some companies may even be closing down their offices in the future. As a result of slower construction activity, the real estate sector has grown only by 1.2 per cent as compared to 5.7 per cent in the first quarter last year. Many developers are facing problems in completing their projects due to high interest rates. Many are selling half-finished properties to recover their money. A slump in real estate will mean fewer jobs for construction workers and less demand for construction materials.

The gloomy global scenario has affected Indian companies' borrowings abroad and it has been impacting their investment outlook. In the recent past, because of the much lower interest rates in the US and the EU, Indian companies had been borrowing abroad to pay back creditors and for business expansion but due to the ongoing recession, foreign sources have been drying up. Recently the Reserve Bank of India had relaxed the ECB (External Commercial Borrowing) guidelines, enabling companies to borrow more from abroad, but this has not helped. The government recently allowed Indian companies to borrow in the yuan up to $1 billion which could be considered a good development. The demand for dollars from Indian companies and importers in the domestic market pushed the rupee to a new low of Rs 48 to a dollar recently. This would have helped exports, but the rupee is already sliding up with the latest announcement of yet another repo rate hike (by 25 basis points) which will mean higher interest rates and attract more foreign inflows.

But seeing the weak markets abroad due to the downgrading of US treasury bonds by Standard & Poor's, several Indian financial institutions, including the Rural Electrification Corporation, the Industrial Development Bank, the Bank of India and the Indian Bank, have already postponed their overseas offerings. Thus, efforts for raising money abroad for business expansion have remained constrained.

Clearly, the problems surfacing both in international and domestic markets have eroded the investment confidence of India Inc. The recent data show that all industrial sectors except for electricity production have slowed down. While car sales plunged by 10 per cent in August 2011, sales of consumer goods and consumer durables have remained positive. There was 8.6 per cent growth in consumer durables like fridges, ACs, TV sets, washing machines, etc, which was a huge improvement from June 2011 when it was only 1.5 per cent. Growth in non-durables increased by 4.1 per cent. Only the production of intermediate goods contracted while that of basic goods (steel castings, aluminium, stainless steel, etc) grew by 10.1 per cent.

The biggest decline has been in capital goods production, which signifies a slowdown in investment and will affect future industrial growth. The recent hike in interest rates will adversely impact the production of consumer durables and in the construction industry and this will also have an adverse impact on small and medium scale enterprises' production and their expansion plans. All EMIs will go up, and for the ordinary middle class person the hike in the prices of petroleum products will mean disaster for their budgets.

The main reason for worry is that if industrial production does not pick up for the month of August, it is almost certain that GDP growth will not touch 8 per cent and will be around 6 to7 per cent only this year. It has already declined to 7.7 per cent in the last quarter. While 6 to 7 per cent may be a good growth rate for a small country but India faces the problem of providing jobs to its youth and the main impact of a slowdown will be on employment growth. Around 12 million youth are expected to join the labour force every year. Where will they find jobs if there is a marked slowdown in manufacturing, mining and service industries? Fortunately agriculture has been growing well at 3.9 per cent, otherwise there would be more job seekers migrating from villages to towns in the near future.

The combination of high food inflation and general inflation, which was up at 9.78 per cent recently, and lack of sufficient job opportunities due to slow growth in the manufacturing sector in particular can spell disaster for a highly populated country like India. The government has a tough task ahead of controlling inflation and providing jobs for all in the future for its own stability and for the internal security of the country.

(Dr. Jayshree Sengupta is a Senior Fellow at Observer Research Foundation)

Courtesy: The Tribune

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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