With curtains falling on the general elections,a sharp 2.3 per cent dip in industrial output in March the worst in 16 years will present an immediate challenge to the new government of reviving confidence in India Inc. The stock markets may have ignored this and staged a surprise rally,gaining 475 points or 4.1 per cent to close at 12,158 but figures released by the Central Statistical Organisation showed that for the full year 2008-09,the IIP grew just 2.4 per cent compared with a robust 8.5 per cent in 2007-08. Of deep concern was the fact that the manufacturing sector that makes up almost four-fifth of the index of industrial output (IIP) contracted 3.3 per cent in March,leading to a sharp fall in the IIP growth rate. In March 2008,the manufacturing sector had grown 5.7 per cent,aiding a modest 5.5 per cent growth in industrial output. These dismal numbers come after three rounds of fiscal and monetary stimuli did their bit to provide liquidity to firms and perk up the industry. The Planning Commission estimates that the stimulus would likely add 0.5 per cent to the gross domestic product in 2008-09. While frozen financial markets abroad adversely affected big Indian companies,the domestic credit squeeze dealt a major blow to small enterprises. The credit crunch crowded out the MSMEs (micro,small and medium enterprises). Hopefully,the first task of the new government will be to get the economy back on track, said Suresh Tendulkar,Chairman,Prime Ministers Economic Advisory Council. The mining and electricity sectors which have a 10 per cent weight each in the IIP did not do well either. For 2008-09,they grew 2.3 per cent and 2.8 per cent respectively. In the year earlier,mining posted a healthy 9 percent growth rate and electricity a modest 6.4 per cent. Ajit Ranade,Chief Economist,Aditya Birla Group,said the global financial crisis choked multiple sources of funding such as ECBs,FDI,private equity and NBFCs and put the entire onus of providing funds to India Inc on domestic banks. But many sectors were shut out of the credit market given the caution that banks exercised based on their risk-reward ratios, he said. Though many economists did not quite expect a slump in manufacturing in March,some saw the writing on the wall. Pronab Sen,Chief Statistician of India,said,Exports fared poorly in March declining 33 per cent. The first signs of some hope have come only in April, he said. Moreover,an upward revision in IIP numbers is not uncommon. The provisional figures of IIP in October and January that were negative in the quick estimates turned positive after their first revision. For February,the IIP number was today revised to show a contraction of 0.76 per cent compared with 1.2 per cent deceleration in the quick estimate. Clearly,the Indian industry is looking forward to the Budget expected to be presented by the new government. There needs to be some attempt towards fiscal consolidation. And the stance of the government on inflation will be keenly watched. There are fears in certain sections that down the line,India may have a problem of rising inflationary expectations given the fiscal and monetary stimulus that the government and RBI have provided, Ranade said.
