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An industrial recession scare

An industrial recession scare
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First Published: Thu, Feb 12 2009. 10 22 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Thu, Feb 12 2009. 10 22 PM IST
It is a sign of the changed mood in India that the slump in industrial output in December did not send the stock market into a tizzy. And there is no reason to believe that the dark clouds hovering over Indian industry will be blown away soon.
Policymakers are likely to respond with alacrity. The sharp decline in industrial production as well as the further drop in inflation raises the chances of another round of interest rate cuts by the Reserve Bank of India in the coming months. The Manmohan Singh government is in its last lap before the national election, but it could use the new data to push through another fiscal package that will leave the new government with higher public deficits and debt.
Illustration: Jayachandran / Mint
The third quarter of the current fiscal year has been a terrible one for industry. The Index of Industrial Production dropped 0.3% in October, the first such instance since the index in its current form began in 1994. That was followed by an anaemic 1.7% rise in November and now a 2% tumble in December.
The global economy continues to sink into deeper trouble and while India is likely to be spared the worst, it is hard to believe that the economy will buck the overall global trend. And while services and agriculture may prop up economic growth, industry is likely to either stagnate or slip into a protracted recession.
The December fall in industrial output was not totally unexpected—most consensus forecasts were suggesting a minor drop. But the actual decline shows that the damage to the industrial economy is far worse and more widespread than what most assume. The slump in the production of consumer goods is a worry, though capital goods output has been surprisingly buoyant.
A prolonged industrial recession will hurt the finances of both the government and the private sector. The Singh government has been banking on strong tax revenues to fund subsidies and various social sector programmes.
Sluggish tax collections could lead to a huge public finance mess, especially if aggressive spending programmes continue to be announced. The bond market is already aware of this and is pushing up borrowing costs.
Meanwhile, companies that have gorged on debt after assuming that the good times will not end will find themselves struggling with inventories and underutilized capacity. It is time to think seriously about the risks all around.
Will this be a prolonged recession for industry? Write to us at views@livemint.com
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First Published: Thu, Feb 12 2009. 10 22 PM IST