Domestic industry at a standstill
It may be time for the government to review the performance of the country’s industrial sector, which has nearly stopped growing. The only exceptions are middle-class housing, cars and motorbikes and, of course, cellphones that are mostly imported or assembled. Behind the stagnating industrial growth is the massive import of such products mostly from China, for which there exists a substantial domestic capacity. Random import of goods, manufactured by the large, medium, and small-scale units, has, to an extent, depressed domestic production. To give an example, the value of imports from China, this year, could exceed a whopping Rs. 5,60,000 crore. Not all imports from China enter through the channel requiring formal customs clearance. Many are simply smuggled through Nepal and north-eastern states bordering China, Myanmar, and Bangladesh. Smuggled imports hit domestic medium and small industries while regular large imports choke the production of the country’s organised sector.
This year, the average industrial growth rate has been extremely low and irregular as well, varying from a maximum of around 3.5 percent to the negative. As a result, there is little demand on banks for high borrowing. Bank credit to industry, according to the Reserve Bank of India’s latest report, declined to 0.2 percent in August. Lower lending rates are not attracting industrial borrowers. That explains why banks are shy of responding wholly to RBI rate cuts. Only higher demand for domestic products can stir local production and industrial growth. India’s economy is not export-led. Domestic demand decides domestic supply unless it is substantially met through artificially cheaper imports from export-oriented economies and smuggling. Imports eat into both domestic production and domestic employment. Massive avoidable imports are bolstering the services sector, which is thriving merely on distribution through low-rated and as also contract or part-time workers.
Interestingly, the retail banking is doing reasonably well as individual borrowings and purchases under EMI schemes for homes, shops, and establishments, cars to cellphones are going up. In August, retail loans grew more than 18 percent from the previous year level to Rs 14.56 lakh crore, with housing loans making up for more than 54 percent of the pie. Vehicle loans accounted for nearly 11 percent. In a way, this has come as a face saving for banks, especially those majority state-owned entities otherwise reeling under the pressure of large bad loans. The RBI data, released earlier this month, showed the fall in bank credit to industry for the first time in at least five years on a year-on-year basis to 0.2 percent to Rs. 26.18 lakh crore. According to the RBI, credit deployment in medium and small and micro industries declined 5.5 percent and 3.7 percent, respectively. It noted that industrial credit has been depressed since the beginning of the current financial year, struggling to clock 1 percent growth as banks have turned cautious amid the worsening asset quality while private investments remained muted.
The State Bank of India, the country’s biggest lender, is concerned like most other banks as credit off-take from the corporate sector continues to be low even as the so-called busy season just began in October. Companies with better balance sheets are tapping the equity and bond markets, instead of banks, for cheaper funds. Corporate bank loans have contracted in many cases as they find it more urgent to repay earlier high-cost loans. Analysts expect industrial credit off-take to languish for some more time as companies increasingly move to raise cash from money markets, which have been more efficient in transmitting lower policy rates to borrowers than banks. The situation is pretty peculiar for both the stagnating industry and banks though it does not get reflected in the government’s economic growth claims. The low industrial growth has impacted almost all key sector of the economy such as steel, coal, power and engineering. Worse still, nearly all of them are also saddled with excess or underutilised capacities. As a result, industry has either temporarily shelved or is going slow on capital expenditure for modernisation, expansion, and diversification into new areas.
The industry does not seem to have an easy way out of the current situation. It is waiting for a massive investment push in the field of infrastructure which can come only from the government. Unfortunately, the government, both under the Congress-led UPA and, now, under BJP-led NDA, has done little to invest in infrastructure. This is despite the fact that the country badly needs substantial investments in roads, seaports, and airports, railway systems, cross-country petroleum and gas pipelines, river controls, water supply and sanitation. And, this can be undertaken only by the government. These projects are highly capital intensive and have long gestation period. They can’t be left with the fund-starved domestic private sector. Most Indian enterprises are financially incapable of undertaking such projects.
The earlier the government realises this fact, the better it is for all. The government of India can borrow from multilateral agencies such as the World Bank, Asian Development Bank, etc., and seek bilateral fund, project and technical assistance from friendly countries such as the US, Germany, France, Japan and Russia to implement key infrastructure projects. Indian firms can work as sub-contractors and suppliers. The time is running out. The government is taking too long to finalise and implement these projects which are extremely vital for industry and India’s long-term economic growth. Maybe, the Prime Minister himself has to get down on the act. Most of the large and critical infrastructure projects are hanging fire for over ten years.
(The views expressed are strictly personal.)