A recent National Statistical Office (NSO) data pointed that the Index of Industrial Production (IIP) in India has contracted by 16.7% annually in March, 2020 as compared to a 2.7% expansion in March, 2019. This is the highest fall of the IIP in 39 years. NSO is yet to publish the IIP data for April - which is expected to be worse.
India was suffering from a low industrial output since FY 2019. During the second quarter of the last financial year (FY 20), the industrial production has been lowest - plunging to 4.3% in the last eight years. The IIP fell from 3.8% to 0.6% between 2018-19 and 2019-20 (April-November). Overall, IIP growth has been 3.8% in 2018-19 compared to 4.4% in 2017-18. RBI Governor Shaktikanta Das on May 22 announced, “Industrial output has shrunk by close to 17% in March with manufacturing activity down by 21%. Output of core industries has contracted by 6.1%.”
Problem in core industries
The index of eight core industries measures the performance of industries like coal, crude oil, natural gas, refinery products, fertilisers, steel, cement, and power. These industries encompass 40.27% weight in the IIP. The core sector output has observed a 6.5% shrinkage in March. Crude oil production had contracted by 5.5%, natural gas production had contracted by 15.2%, refinery products by 0.5%, fertilisers by 11.9%, steel by 13%, cement by 24.7% and power by 7.2%.
Slump in export
India’s dependency on Chinese imports is significant. In India’s total electronic imports, around 45% comes from China. Around one third of machinery and almost two-fifths of organic chemicals are also imported from China. For automotive parts and fertilisers, China accounts for more than 25%. ASSOCHAM in its report titled ‘Recommendations for a National Response to the Economic Impact of Covid-19’ informed, “India imports 18% of its merchandise from China and given the closure of the latter, the worst affected industries include electronics, consumer durables, auto components and pharmaceuticals. Sectors that depend on China for raw materials, spares and finished products would need to revaluate their procurement strategies.” India’s self-dependency for raw materials is necessary to boost its industrial production during this uncertain phase.
FICCI’s ‘Business Confidence Survey’ published in April, 2020 stated that the pandemic has significantly impacted the industrial cash flow – with almost 80% organisations reporting a decrease. According to many industry insiders, direct liquidity inflow can help certain industries.
Rajiv Bajaj, MD and CEO, Bajaj Auto recently stated, “I feel something that is simpler, specific and sustainable - if it had come directly as in the US, Japan or Austria would have been more meaningful.” He added that the pandemic will leave a long-term impact for some industries. He suggested immediate governmental attention to relieve those severely affected industries.
Tanmoyee Banerjee, Professor, Department of Economics, Jadavpur University, told BE, “Due to the lockdown and the Covid19 outbreak, our industrial output growth rate has slowed down and the GDP growth rate is almost negative. At this juncture, given that millions of people have lost their jobs and are being displaced, we need a strong demand side push from the government. The recently announced economic package mostly gives support to the supply side of the economy. Only the `40,000 crore allocated to the rural employment guarantee scheme will help the rural poor and is a direct boost to the demand side. We need more of such policies instead of easing out the liquidity requirement for the supply side. Increase in demand is extremely necessary for the revival of the industrial output.”
The central government has announced for industrial cluster up-gradation of common infrastructure facilities and pushed for enhanced connectivity. Additionally, the RBI had announced a special refinance facility of Rs. 15,000 crore to The Small Industries Development Bank of India (SIDBI) for on-lending/refinancing. These positive steps may help the industrial sector but much more is needed to ensure a robust recovery.