AIR spotlight summary on “Growth in Industry Sector and GDP Target”
The recent announcement of IIP by the government shows that in August IIP figures have contracted by 0.8% and we see a GDP growth of 7.6%. We see a mismatch where the industry is not able to perform well and there is expectation that the economy would grow by 7.6%.
India’s growth projections
- India’s growth projections are very optimistic and IMF has projected that India will grow at 7.6% and even the RBI and Government is projecting higher growth trajectory. There seems to be some mismatch because industry is not growing at good rate and we are anticipating good growth trajectory.
- There is strong reason for good growth supported by good monsoon. The industry is not able to do well, and the Finance Ministry has to depend more on agriculture sector. Services sector contributes more to the GDP. Growth of services sector is around 9%. So 5.4% of GDP is contributed by the services sector.
- Growth in the agriculture sector is anticipated well at around 5%-6% and this makes 1% contribution to GDP at present to 6.5%.
- Industry sector including construction contributes around 25%-26%. IIP numbers are only indicative numbers which shows the industry’s growth trajectory. If manufacturing sector performs well, then growth of overall industrial development will be around 4%-5%.
Low Demand in the Economy
- Demand is not in a comfortable trajectory. Demand is the major factor to attract the industrial investment and for the growth of the industrial sector at the faster rate. Private final consumption is growing at 7%-8%. This is not lucrative for the Indian economy because we have lot of potential to grow faster.
- If Demand is there, then private sector will come forward to invest in the economy. Industrial sector will see more capital expansion and then growth of investments and growth of Industry.
- Lack of demand is happening not only in India but throughout the world. So India is not growing well in exports sector. Our currency is depreciating and we have good opportunity to increase our exports, but there is lack of demand in the international market.
- Major problem in the international and the domestic scenario is in the demand side. We are anticipating rural demand to rejuvenate because of the good monsoon. Good monsoon not only leads to growth in agriculture sector, it is also good for the growth in the industrial sector.
- Large industries are mainly depended on foreign market and export market. So the large corporate are not able to perform well in the current economic scenario. Whereas MSME sector are depended on domestic demand and reforms in the entrepreneurial sector.
- 70% of the population resides in rural areas. So if 70% of the country is not growing, i.e., if the rural demand is not growing then the industrial sector cannot perform well despite all the government incentives.
Role of Finance in the Economy
- Ease of doing business is improving in the last 2 to 3 years. But Industry faces many problems particularly the MSME sector. The major problem is the lack of access to finance for its industrial expansion. If financial constraint of MSME sector is resolved, then India can achieve a good growth in the industrial sector.
- At the ground level finance is not available to the MSME sector. Many survey’s say collateral is demanded by the financial institutions. People are not able to provide the collateral.
- Another issue is the lack of competitiveness in the cost of finance. Statistics show that we are in the higher trajectory in the cost of credit. Big manufactures of the world economic system are competitive in providing finance to their MSME and industrial sector.
- MSME sector is availing finance at the rate of 13% which is totally uncompetitive when compared with international peers.
- The government has taken few initiatives to improve the quality and cost of funds available. These are the MUDRA bank, Small Payment Banks, Public Sector Banks lending, loans from SIDBI, refinancing of loans by NABARD which provide cost effective finance.
Issues with the Industrial sector
- Another problem with the overall industrial sector is the lack of reforms in the factors of production. GST is getting a major breakthrough in the coming days, but the labour laws, availability of land, availability of utilities like power, water etc needs reforms.
- If the industrial sector is growing well then we can anticipate a double digit growth trajectory for the Indian economy.
- From the supply side there are lot of bottlenecks for the industrial sector. There must be reforms in the labour market after the implementation of the GST. Through this Industry will be able to deploy more workforces in the system, there will be income generation, there will be demand for goods and services and so the manufacturing industry will also be boosted. This will be a positive cycle for the economy.
Need of the Hour
- There is an urgent need for Public investment and reforms in the agriculture sector. There must be price incentives to the agriculture sector. If income levels of the agriculture sector grow, we see increase in the consumption and further growth in the manufacture sector.
- We have to shift the disguised labour force from the agriculture sector to the other sector which is the construction sector. There are lot of problems in the construction sector like high cost of funds and low demand. If Construction sector is supported by some lucrative policy environment then there is lot of potential to absorb unskilled and semi skilled workforce. This will give a major fillip in the overall economy.