Can Indian Manufacturing Isolate Itself from U.S. Recession?

A slowdown in the US economy is bad news for India. What's more, the deterioration in the global macro environment coupled with continuation of higher interest rates could eventually result in deceleration in consumption spilling over to other sectors, thereby affecting future gross domestic product (GDP) growth of the country.

According to International Monetary Fund Director General Dominique Strauss-Kahn, emerging economies including India and China are not immune to slowdown. The large fast-growing economies like India and China have not “decoupled” from poor growth prospects in the United States and Europe. “The industrial and emerging economies are like two horses yoked together,” Strauss-Kahn said.

The industrial sector is likely to witness a slowdown and will remain in single digit growth throughout this year, as the country faces various headwinds including an appreciating rupee, poor infrastructure and rising borrowing costs, according to global credit rating agency Moody's. “The combination of softer domestic and decelerating external demand, particularly from the United States, India's largest export market, is expected to weigh heavily on India’s industrial sector in the coming months,” Moody’s Economy.com’s Director of Asia Pacific Economics Ruth Stroppiana has stated.

Dull performance of manufacturing and mining, coupled with poor output of the consumer goods sector, pushed the country’s industrial growth rate to 7.6 percent in December 2007, compared to 13.4 percent in the same month of 2006. “We expect India's industrial sector to slow in 2008, as near decade-high borrowing costs would weigh on demand for locally produced interest rate-sensitive goods, particularly consumer durables. The annual industrial output growth will remain in the single digits throughout most of 2008,” Moody’s Economy.com said in its latest report.

Slipping growth rate

India’s overall industrial growth rate for April-December slipped to 9 percent, as opposed to 11.2 percent for the corresponding period in the preceding year. Growth has slowed down across the manufacturing, mining and electricity sectors. Part of the slowdown in manufacturing, to 8.4 percent, can be attributed to a statistical quirk: the base effect, of comparing December 2007’s growth with the spectacularly high growth of 14.5 percent achieved in December 2006.

However, according to a survey conducted by global consultancy firm KPMG, the manufacturing sector in India is showing signs of “buoyant levels of confidence” regarding the prospects of business activities during 2008. According to the winter 2008 KPMG Business Outlook Survey, in contrast to the financial market gloom in the United States, the picture was not as dim in India.

Ian Gomes, chairman of KPMG's New and Emerging Markets Group, said, “Manufacturers in India expect to maintain rapid expansion in 2008, underpinned by continued buoyant demand conditions.” Setting out expectations for business activities over the next 12 months in India, the survey said the outlook for India's manufacturing sector was positive in January, with companies highly confident that activity, new business, revenues, profits and employment would all be up on current levels in 12 month’s time.

However, the outlook for inflation in India was also strongly on the upside, with widespread expectations that both average purchase prices and output charges would be higher at the start of 2009. Almost two-thirds of Indian companies forecast a rise in business activities, with a similar proportion anticipating a hike in business revenues. The main factor expected to underpin growth of manufacturing revenues is successful marketing initiatives. Indian companies expect to benefit from innovation, with the launch of new product lines set to lead to a rise in business revenues.

India’s surge

According to a response of more than 340 of the world's largest international manufacturing companies—from Europe, the Americas and Asia Pacific—in a study by global consultancy major Capgemini, India is set to threaten China as the world's backyard for manufacturing in the next three to five years. It says companies are planning to offshore manufacturing activities primarily to India that will surpass its information technology activities.

Some incentives for manufacturing are expected in the 2008 Indian government budget. To spur manufacturing, the government is promising to do more than it has in the past. The program of Special Economic Zones offers a virtual tax-free regime. There are also other projects including agro processing parks, textile and garments parks, industrial infrastructure development plans and the like, which are essentially to enable manufacturing units to share infrastructure, mostly created by the government. Excise duties have already been made much softer in important sectors such as textiles and metals.

Prime Minister Dr. Manmohan Singh has expressed confidence that, given the current rates of savings and investment, the country will sustain economic growth of close to 9 per cent in the medium term. The Central Statistical Organization has forecast 8.7 per cent growth in the GDP in the current financial year. The investment and savings rates, at 38.5 percent and 37 percent of GDP, respectively, are at historic highs. “Our objective is to ensure that this growth process is inclusive, in all dimensions, and can be sustained while holding inflation under check. It has been our endeavor to ensure that inflation does not get out of control,” Singh said.

In short, Indian manufacturing will still be growing, just at a slower pace.

About the Author_
Uday Lal Pai,udaylalpai@gmail.comis a freelance journalist based in India.