News that the month-on-month rate of growth of Indian industry as measured by the Index of Industrial Production (IIP) was a negative 1.8 per cent must trouble the government. This is the fourth time in nine months that the rate recorded was negative. There has been only one month over the year ending June in which the rate has exceeded 5 per cent. That compares with rates of 20 per cent attained just before the global crisis of 2008 and 15 per cent at the height of the post-crisis recovery. Clearly, organised industry, which the IIP covers, is in the midst of a slump.
To speculate on the factors explaining the slump we need to revisit those that drove the pre-crisis boom. Three in particular have received much attention. One is export demand, with some evidence that it contributed to buoyancy in some non-traditional export sectors like chemicals, pharmaceuticals and even engineering. However, manufactured exports have never been the prime driver of industrial growth in the Indian context, and they have been adversely affected by the European crisis only recently. Other factors must have had a greater role to play in triggering the industrial slowdown.
A second source of stimulus for industrial growth has been public expenditure, which in recent years has been financed substantially with debt. The neoliberal obsession with the size of the public debt to GDP ratio and well-above-target fiscal deficit to GDP ratio has indeed put pressure on the government to rein in expenditure. This, together with a biased revenue sharing arrangement favouring the Centre, has constrained expenditure by the state governments to an even greater extent. And though the central deficit has widened in recent times, the low level of the tax to GDP ratio implies that the level of spending or the fiscal stimulus associated with that deficit would not have large. Thus, repressed government expenditure would indeed have limited the rate of industrial growth. However, this is a longer-term tendency and has been operative for some years now. While a sudden slowdown of growth may have aggravated this problem by adversely affecting revenue generation, fiscal conservatism cannot be the original cause of for such a slowdown.