Will the number of Index of Industrial Production (IIP) for June, 2009 mark an early sign of recovery? Well, it has signaled hopes of an economic recovery strengthened by the factory output surging to a 16-month high of 7.8 per cent growth in June, beating forecasts by a wide margin and reversing the bleak trends that had set in since the deep shadow of world economic slowdown had impacted Indian economy. Everybody on the payroll of the Government has jumped on to the opportunity of calling it a reversal of downhill journey. Even others in the fourth Estate have also joined the bandwagon, which is partly because of all three components of the Index registered impressive growth rates with Mining growing up by 15.4 per cent; Electricity by 8 per cent and Manufacturing by 7.3 per cent. To add icing, from the use-based perspective, the driver of this performance was Consumer Durables, which grew by 15.5 per cent, which continued its own streak for almost three months in running.

Now that the economy is perceived to have taken an about-turn with industrial production picking up, the moot point is whether the buoyancy reflected in IIP informs other sectors of Indian economy, particularly exports?

Impact on Indian Economy

First, its impact on Indian economy. Only if you read the June 2009 figure for Manufacturing with those of months of April and May 2009, you can reach a more sober conclusion. The industrial output transited from negative area to positive by a meager 1.2% in April, following by 2.2% in May, which were in fact scaled down from the earlier forecast of 2.7%. However, the June 2009 figures "no longer looks like flash in the pan" to FICCI President Harsh Pati Singhania. Several analysts also have attributed the June numbers to the impact of stimulus measures announced and implemented by the Government and the Reserve Bank of India. Rating agency Crisils Principal Economists, D.K. Joshi said, "This is more than expected. It is mainly driven by the fiscal and monetary stimulus. Interest rate softening has started showing positive impact on the industry." Finance Secretary, Ashok Chawla said, "High growth in Indias capital goods sector is a sign of turn-around in the economy and the positive trend in industrial output will continue."

However, nobody seems to apply ones mind to the fact that the so-called financial stimuli I, II or even III were sanctioned sometime in December/January/February and were operationalised immediately. It would be recalled that the loss of demand, both external and internal, had led to decline in production of products and machinery, which were needed to be replenished at some point of time, after the inventories had touched rock bottoms. That would have provided some impetus in demand which resulted in production picking up. But then, there is a steady, but surely slow growth. From a mere 1.2% increase in production in April to a downsized target of 2.3% in May, the production leapfrogged to 7.8% in June, with apparently no major new factor coming in.

A more acceptable assessment did come in from Dun & Bradstreet India Head (Economic Analysis) Yashika Singh, who said the June growth data could be an aberration, but the economy is certainly stabilising. Singh added, "Therefore, it may be premature to state that this is a sustained industrial bounce-back, and perhaps cautious optimism needs to be maintained when reading into these numbers. Nonetheless, growth in industrial production in recent months has shown signs of stability returning into the economy."

FICCI Survey Confirms Slowdown Impact on 94% SMEs

The fiscal stimuli announced by the Government of India with so much fanfare had had little blaming effect on Small and Medium Enterprises (SMEs) as 94% of them, mostly catering to the export markets, are languishing in the remains of the slowdown, says a survey conducted by Federation of Indian Chamber of Commerce and Industry (FICCI). According to the survey, most of the respondents reported that their overall business has been affected "severely or moderately." The participating companies indicated that they have lost most of their major markets primarily in Europe and the US and are struggling to find new markets for their products. Perhaps, the most revealing statement in the survey is that almost three in every four companies said that they were not aware of the stimulus measured announced by the Government for the SME sector. "Out of those, who were aware of the incentives, a majority of them indicated that such measures have not really enabled them to regain business momentum."


Impact on Exports

India's external trade continued to shrink both in June and July, as the overseas and domestic demand remained weak. July exports dipped 26.6% year-on-year basis to $12.53 billion, which was marginally better than the 27.7% negative growth posted in June. Preliminary estimates by the Directorate General of Commercial Intelligence & Statistics showed that imports for the month contracted 37%, steeper than 29.3% dip in July; apparently because of reduced demand.

The export growth has been in negative territory for the last 10 consecutive months now. The imports, too, have contracted for the last 7 months. While some hopefuls have been anticipating some revival of overseas demand in key export destinations like the US by the end of 2009, which view is not being shared by others, the fact remains that it does not appear that India would be able to get any respite. This is being endorsed even by Government of India officials like Rahul Khullar, the Commerce Secretary, who says, "The situation is grim. I do not know when exports are going to register positive growth. The foreign trade policy is the last opportunity to give exporters some help to tide over the crisis."

Impact on Garment Exports

The continuing recession in global markets refused to relent, and has taken its toll in so far as Indian garment exports are concerned, right from September, 2008 through today. While the month-wise status of Indian garment exports has already been discussed, in ample details, in our earlier issues, I would rather like to focus on it in the current fiscal. The information available so far (almost upto the point of going to the press) relates to June 2009. The latest figures show that there has been a depressing decline of 15.4% in the first quarter of current fiscal i.e. from April through June, 2000, as India exported garments worth $2.41 billion against $2.85 billion during the same period last year.

In June 2009 alone, garment exports aggregated to $870 million, representing a fall of 10.15% from $968 million in June, 2008. In May 2009, we could export garments worth $765 million in May 2009 as compared to $863 million in May, 2008, representing fall of 11/35%. In June 2009 we exported garments worth $809 million, representing a fall of 8.71% from $ 886 million in April 2008. The fall was not confined to any particular segment of garments, it was wide-spread and in some cases more acute like silk garments, where exports shrank by a massive 29.31% to $82 million during April to June this year, as compared $116 million in previous year. Man-made fibre clothes declined by 27.2% during first quarter of current fiscal as compared to the previous year. During the same periods, export of cotton garments slipped 14.13%; woolen garments tumbled by 7%, while textile exp orts declined by 5.5%. "Thus the erosion was spread across all categories" said AEPC Chairman, Rakesh Vaid.

Shrinking Employment

It has been noted that the economic slowdown has hit the overall employment situation, though job losses in export-oriented sectors have been the most dramatic. Between April and June, 2009, jobs in export units declined by 1.67 lakhs, while non-export units created 35,000 new jobs, according o the recent Labour Bureau report. Another 48,000 jobs were lost in ITES/BPO units during this period, indicating pressure on Indias services exports as well. Lot of hopes had been raised by the repeated assurance that the export sector, particularly those in labour-intensive areas, would be given help by the Budget 2009-10, but nothing materialized.

A Disenabling Budget

Though not a day passed, ever since the UPA-II took charge of running the country, when some announcement or clarification was not made promising all help to exporters, who had to bear the burnt of global economic slowdown. What they have provided in the Budget Proposals like offering 10 grams of peanuts to a starving person. Apart from some long-term plans of setting up some clusters in handloom sector, inadequate increase in Market Development funds, the Budget proposals announced availability of funds for long over-due reimbursement of 5% subsidy under Technology Upgradation Fund scheme. Even the much-trumpeted Budget provided for funds ONLY to meet the obligations till 30 June, 2009 under the Scheme; thus omitting to provide funds under the Scheme for a period from July 2009 through March 2010.

US Economy Unlikely to Recover till 2011

I trust that the world might have bypassed depression, put behind the recession with some green shoots and may have set foot on way to recovery, but it will have to contend with slow recovery-slower than most of us had expected.

It would be interesting to see what Paul Krugman, Nobel Prize winner economist said recently. According to him, "Although the worst of the financial crisis was over, the world now faces a prolonged slowdown like Japans "lost decade" of the 1990s." When asked how do get we get out, he said, The technical answer is - God knows. We have a great shortage of role models." He said, in the past, swift economic recoveries saw affected countries export their way out of trouble by trading with countries with large surpluses. He added, Unless we can find another planet to export to, we cannot have an export-led recovery from this global financial crisis, which means we have a serious difficulty." Some other possible solutions like consumer spending, business investment and housing booms are all unlikely to kick-start the US or world economic this time. He concluded, "We seem to have avoided the Great Depression 2.0. I do believe that full recovery is at least two years and probably more than that off."

EU markets, too, do not offer any scope for imports of Indian textile and garments, even if some of the member-countries have managed to break into the threshold of recovery.

New Markets?

Though the Government has been exhorting the garment exporters (or for that matters all exporters) to explore new markets, as if these can be found out by just waving a magic wand. It is not that the Indian garment exporters have not been looking for new markets, ever since they started exporting, but their efforts have not been met with any resounding success. To sermonize the exporters that the solution to their problem of shrinking exports in the global economic recession period lies in exploring new markets seems to be too simplistic, if not nave.

Even the recent survey undertaken by FICCI confirms that "The participating companies indicated that they have lost most of their major markets primarily in Europe and the US and are struggling to find new markets for their products." It needs to be understood and appreciated that even at good times, the exporters have been attempting to develop "new markets" and their success varied from limited to very limited, how can one think that these exporters have any chance of "exploring new markets" to sell their products, when each and every country is struggling to survive the economic recession and resultant shrinking markets for their products, leading to increasing unemployment and falling incomes. When the going is getting tougher by the day by economic powers and even economic super-powers which has reduced their consumption levels, how can one even perceive that the smaller but "new markets" could help Indian exporters.

Could IIP Surge Promote Exports?

As suggested earlier, the one-time IIP surge could be an aberration, but it is too nascent and too weak to be trusted for even kick-starting the reversal of downward movement of exports, particularly the garment exports, though some people still want to enjoy their pipe-dream. A more suitable food for thought has rightly been identified by The Economic Times, which has set up an ET Jury Rountable with the topics like "Green Shoots or Yellow Weeds?"

Here 'I' refers to the author of the article