New Delhi: Painting a grim outlook of the manufacturing sector, a new government survey confirms a contraction in investments, a growing squeeze on profits as rental and interest burdens rise and the evolution of a structure which is not employment friendly.
The Annual Survey of Industries (ASI), the most comprehensive data on organized manufacturing, reveals that net fixed-capital formation contracted marginally by 0.06% in 2010-11 compared with an impressive growth of 14.63% a year ago. The same data also provides further evidence that the cost of doing business is going up, acting as a further dampener on fresh investments. Interest costs rose 20% in 2010-11, as against 6.75% in 2009-10. Similarly, rental costs were up by 12.6% in 2010-11, in line with rising inflation and property prices.
The new data casts a shadow on expectations of any turnaround in industrial growth in the near future, especially at a time when there is considerable uncertainty about the prospects of the global economy.
Investment peaked in 2009 when demand was propped up by the fiscal stimulus, said R. Nagaraj, professor at the Indira Gandhi Institute of Development Research.
“After that there was a decline. Now demand is coming down (and) that is impacting investments as well,” he said. “Cost of capital has gone up. Inflation has also increased. Domestic interest rates have risen. The cost of servicing the foreign debt has gone up due to depreciation in the rupee.”
The mid-year economic review released by the finance ministry last month said monetary tightening and the higher cost of borrowing had dented the overall flow of investment.
“Poor business sentiment, the decline in gross fixed-capital formation, the dip in the launch of new projects and lower exports continue to put demand-side constraints on industrial growth,” the review pointed out.
ASI is the principal source of industrial statistics in India. Field work for the survey was carried out in 2011-12 throughout the country with a reference period coinciding with the fiscal year 2010-2011. Total sample size for the survey was 61,573, representing about 27% of the total number of industrial units.
Supply and demand-side constraints also squeezed the corporate sector’s profitability, according to the ASI data. Falling demand, both in the domestic and external markets, lowered company profit margins. The data shows that profits, as a share of value added, fell from a peak of 61% in 2007-08 to 55% in 2010-11.
“In the last two-three years, growth rates have declined. If output growth rate is falling, it is obvious that the profit share will fall, as reflected by the falling profitability of the corporate sector,” Nagaraj said.
The mid-year review pointed out that sales growth of non-government, non-financial listed companies decelerated to a 11-quarter low of 11.6% in the second quarter of 2012-13. However, there has been a marked improvement in the growth in net profit in the second quarter of 2012-13 due to lower growth in interest expenses.
With demand, especially export-led demand, expected to remain subdued in the next fiscal as well, growth prospects for India’s organized manufacturing sector are not very bright.
“The growth will depend on both supply side and demand-side factors. On the supply side, cost of capital may come down but as of today it’s high. Demand side will be a problem. During the five-year boom period of 2003 to 2008, it was dream run for industry. Manufacturing exports were growing,” Nagaraj said.
“However, now, with exports declining, industrial growth will have to be domestic demand led. But domestic demand will depend on how sectors like agriculture are performing. Because of all this, a surge in domestic output growth looks unlikely,” he added.
The Reserve Bank of India (RBI) has indicated that it will start cutting policy rates starting in its third quarterly monetary policy review scheduled for 29 January, which many believe will trigger an industrial revival.
However, Rajat Kathuria, chief executive of the Indian Council for Research on International Economic Relations think tank, argued that a reduction in interest rates could lead to an increase in consumption demand without reviving investment.
“Interest rates are only one component and its reduction in reviving investment will have a limited impact. Unless the government does more towards easing infrastructure financing and fiscal consolidation, we cannot achieve an investment growth of 8% till 2015,” he added.
The data also showed the organized sector employed only 12 million out of the 420 million work force in the country. Employment in 2010-11 increased 8.18% compared with 4.34% in the previous year but the share of wages grew marginally.
Nagaraj said the National Sample Survey Office (NSSO) data covers the entire manufacturing sector, while ASI data captures only the factories. The NSSO data reflected the jobless growth phenomenon, where the economy generated only 1 million jobs in the five years ended 2009-10, a period when economic growth averaged 9%.
But the ASI data shows that employment in factories has increased at a steady pace, unlike in the rest of the economy. This shows that while organized sector employment has seen an increase despite automation, employment in the unorganized sector has decreased.