NATIONAL LAW INSTITUTE UNIVERSITY

Project

Economics-2

Growth of Industrial Production In India

Submitted To Submitted By

Associate Professor Rajesh Gautam Rajat Gupta

2013BALLB103
 Table of Contents

INTRODUCTION .......................................................................................................................... 1
Review of Literature ....................................................................................................................... 2
“Why cutting interest rates will have little impact on industrial production” ............................. 2
“States need to reform fast to speed up projects, growth” .......................................................... 3
“Indian industrial output growth slower than expected” ............................................................. 4
“IIP number impacts market sentiment” ..................................................................................... 5
“Indian Industrial Production Growth Lowest In 20 Years, Second Lowest Ever” ................... 7
12 important Industrial Problems faced in India............................................................................. 8
Statistical Analysis .......................................................................................................................... 9
Index of Indusrtrial Production in India – Various Statistical Tools .......................................... 9
Average industrial production ................................................................................................... 10
Average Growth Rate of Industrial Production......................................................................... 11
INTERPRETATION..................................................................................................................... 11
FINDINGS AND CONCLUSION ............................................................................................... 12
BIBLIOGRAPHY ......................................................................................................................... 13
 Page |1

INTRODUCTION
Industrial production is a measure of output of the industrial sector of the economy. The
industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute
only a small portion of GDP (Gross Domestic Product), they are highly sensitive to interest
rates and consumer demand. This makes Industrial Production an important tool for
forecasting future GDP and economic performance. Industrial Production figures are also used
by central banks to measure inflation, as high levels of industrial production can lead to
uncontrolled levels of consumption and rapid inflation.

Industrial Production measures the real or inflation-adjusted output produced by the

manufacturing, mining, and electric and gas utilities industries. The data published includes the
total capacity utilization rate and month-over-month and year-over-year changes for industrial
production and manufacturing output. The change in industrial production is measured monthly
using the industrial production index, with year 2002 as the reference period.

The secondary sector of the economy or industrial sector includes those economic sectors that
create a finished, tangible product: production and construction.This sector generally takes the
output of the primary sector and manufactures finished goods. These products are then either
exported or sold to domestic consumers and to places where they are suitable for use by other
businesses. This sector is often divided into light industry and heavy industry. Many of these
industries consume large amounts of energy and require factories and machinery to convert the
raw materials into goods and products. They also produce waste materials and waste heat that
may pose environmental problems or cause pollution.

Industrial production index is an economic indicator that is released monthly by the Federal
Reserve Board. The indicator measures the amount of output from the manufacturing, mining,
electric and gas industries. The reference year for the index is 2002 and a level of 100.
 Page |2

Review of Literature

“Why cutting interest rates will have little impact on industrial production”

VivekKaul, June 13, 2013

The index of industrial production (IIP), a measure of the industrial activity in the country, grew
by a meagre 2% in April 2013, in comparison to the same period during 2012. The index was
expected to grow by around 2.4%. In the month of March 2013, the index had grown by 3.4%.
This slowdown of industrial growth reflected in the low IIP number is expected to lead to call for
a cut in the repo rate by the Reserve Bank of India(RBI). Everyone from the Finance Minister to
business lobbies to business leaders are expected to join the chorus. The logic is that at lower
interest rates people will borrow and spend more, so will businesses. This will create demand
and thus help revive overall industrial activity and in turn the overall economy. Repo rate is the
interest rate at which the RBI lends to banks.

Conclusion:

Though it clearly shows that cutting in interest rates will have little impact on industrial
production, but if there is frequent decline in the repo rate, deposits with bank will reduce. This
is due to the CRR and SLR which ensure the position of money.
 Page |3

“States need to reform fast to speed up projects, growth”

Swaminathan S AnklesariaAiyar, ET Bureau

Nov 20, 2013

With GDP growth having halved from over 9% in 2010-11 to just 4.5% today, many observers
are demanding more reforms from New Delhi. Finance minister Palaniappan Chidambaram
replies that a new wave of reforms is indeed being implemented. The central Cabinet has cleared
more thanRs 3 lakh crore worth of projects. Yet, industrial growth remains below 2%, and the
index of industrial production has actually fallen in seven of the last 12 months. The Purchasing
Managers' Index for services has, for the first time, fallen four months in a row. Why is so much
effort producing so little result? One answer is that the new efforts are not enough. Second, a
bureaucracy fearful of CBI investigations refuses to move files. But a third reason is, surely, that
reforms in New Delhi are not enough, and need supplementation at the state level.

Gone are the days when an industrial licence was the key hurdle. Today, not just New Delhi but
state governments too have, in their worthy search for inclusiveness, created voluminous laws
and regulations regarding the environment, forests, tribal areas and land acquisition. Even if New
Delhi clears hundreds of projects, state-level clearance remains. That is one reason why mass
clearances by New Delhi have not yielded an investment boom.

Even central regulations are implemented by officials at the district level. The states themselves
have to approve many issues relating to forests, tribal areas, the environment, mining rights,
pollution and land acquisition. In the old days, bribes could fetch these clearances. But in today's
anti-corruption mood, that is no longer possible. So, hundreds of projects remain in limbo.

Conclusion:

The central issue is that GDP has fallen to a great extent in previous years. To increase this,
contribution of industrial sector should be increased for which more industries has to be
established. More land clearance is required which states can help by lifting up some strict
rules.The states must simplify regulations so that mines can be opened within three years of
applying (against 12 years for coal mines today). A better trade-off is required between the needs
of production and the needs of other issues like the environment and land acquisition.
 Page |4

“Indian industrial output growth slower than expected”

International news 24/7, 12 November 2013

AFP - India's industrial output grew by a slower- than-expected two percent in September from a
year earlier, hit by weak demand during the normally high-spending religious festival season,
data showed Tuesday.The increase undershot consensus market expectations of a 3.5-percent rise
and was a far cry from the double-digit increases India enjoyed for large parts of the last decade
when the economy was booming.

Hopes of a big ramping-up of production for India's religious festival season, when it is
considered auspicious to buy everything from cars to gold to electronic appliances, failed to
materialise. Manufacturing output, which accounts for over three-quarters of the Index of
Industrial Production, rose a scant 0.6 percent in September from a year earlier.

Production of capital goods such as factory equipment -- a key signal of investment intentions --
tumbled by a massive 6.8 percent from a year earlier. "Industrial activity in India remains weak,
reflecting the parlous state of domestic confidence and demand," said Moody's Analytics in a
note to clients. "Demand for consumer durables and capital goods is still soft, mirroring poor
consumer and business confidence," the research house added.

Exports have picked up on the back of a depressed rupee, climbing 13.67 percent to $27.27
billion in September from a year earlier, figures Monday showed, But economists say higher
overseas sales can only help the economy at the margins since growth in the nation of 1.2 billion
people is still mainly domestically driven. Despite calls by business to boost the economy, the
central bank last month raised its key lending rate for a second time in as many months to try to
curb inflation. The weak output data came as separate figures showed that consumer price
inflation last month crossed 10 percent. Consumer price inflation, increasingly watched by
economists along with the main Wholesale Price Index, climbed to 10.09 percent in September
from 9.84 percent a year earlier. The rate fuelled expectations of another interest rate increase,
economists said.

Conclusion:

Contribution to GDP reduced because of lower demand in economy. It was expected to increase
during festive season but it did not. So, demand in local market is not high. Thus, we need to
focus on our exports to expand our industrial production.
 Page |5

“IIP number impacts market sentiment”

VikasAgarwal, ET Bureau

Dec 18, 2011

Policymakers are struggling to strike a balance between growth, inflation and interest rates. The
inflation rate here is ruling at uncomfortably high levels despite several key interest rate hikes by
the Reserve Bank of India (RBI). Due to the monetary policy tightening, the lending interest
rates have reached levels where they are hurting industrial growth as well as consumer and
borrower sentiment. The signals of an industrial slowdown are getting stronger by the day. It is
clear going by the negative growth (-5 .1 percent) in the Index of Industrial Production (IIP) data
released last week for the month of October. The negative IIP data is a result of the steep fall in
production in major sectors such as manufacturing, mining and capital goods. The IIP is an index
and indicator of growth in various key sectors. It is statistical data that measures the level of
industrial activity in the economy. The IIP tracks sectors such as mining , power, manufacturing
etc. The IIP data is tracked by market analysts as an indicator of the overall economic activity,
and its sustainability .

Reasons for sharp drop

The main constituents of the IIP are the manufacturing , mining and capital goods sectors. The
slow growth in these sectors is the main reason for the lower IIP growth number in the last few
months. On top of it, the high base effect of last year and some domestic issues added to the
pressure on the IIP numbers. Consequently, there was a decline in the IIP for the month of
October.

Significance of IIP

These IIP numbers are the worst since March 2009. The IIP growth in September also remained
quite low at 1.8 percent. Though analysts were expecting a lower number in October, the
negative figure surprised everyone including policymakers. The market undertone is already
quite bearish due to the global concerns and the IIP decline has added to the negative market
sentiment.The sentiment is expected to remain negative in the short to medium terms and
investors should avoid taking fresh positions in these sectors.

Impact on market sentiment

The negative IIP number has an impact on market sentiment. Some factors such as the drop in
mining activity due to local issues, reduced investment activity that resulted in lower capital
goods index etc have also contributed to the lower IIP number. The previous year's high base
effect has had an impact on the lower IIP growth this year too. The IIP index grew by a steep
11.3 percent in the corresponding month last year. There is a lot of panic reaction in the markets
due to the already-prevailing negative sentiment. The decline in the IIP is certainly an area of
 Page |6

concern. However, it is not totally unexpected as the global economy is in bad shape and the
domestic economy is facing high inflation that needs to be controlled. It is important for India to
maintain its economic growth momentum. The policymakers need to take appropriate actions to
control the long-term fallout, and enable the economy to maintain a growth momentum.

Conclusion:

This article emphasizes on the problems faced by industrial sector and subsequent decline in IIP.
There is high inflation rate in economy due to which prices of product are rising due to which
industrial production is affected. To recover, overall economic growth should be maintained by
keeping check on long term policies.
 Page |7

“Indian Industrial Production Growth Lowest In 20 Years, Second Lowest Ever”

Deepak Shenoy, May 12th, 2013

India’s Index of Industrial Production (IIP) data for March 2013 shows the slowest annual
Industrial growth in 20 years, and the second lowest since 1982 (from when IIP data is
available). At a measly 1% growth over last year, our average IIP number over the year is at the
lowest since 1991-92. (Average IIP number is the IIP average for the whole financial year, which
removes intra-year seasonality). India's industrial production growth lowest in 20 years.

Remember, 1991-92 was the last major crisis in India, when we have a Balance-of-payments
issue of gargantuan proportions. The government had to resort to emergency borrowing from the
IMF and had to devalue the rupee, remove the huge licencing requirements for every industry
and free the economy. Growth only started after that and it took three years to reach heady levels
again. Mining is at its lowest ever growth number since 1982. This is likely to be the impact of
court orders to cut mining until license corruption issues are sorted out. Manufacturing is at its
lowest since 1992, and at the second lowest ever. Manufacturing has the highest weight in the
index (currently 75%). Electricity isn’t at a low. Index averages for 2000 to 2003 were lower.
But looking at the last big crisis of 1992, we see that electricity IIP growth was then at 8.5%.
Stock markets might not recognise this as a problem as we continue to close in on the all-time
highs (just 3% away). You could say they are forward looking and that we have “bottomed out”,
or that IIP isn’t a useful number to see, or that an annual “average” could be impacted by a
problem that was only visible early last year. The last factor isn’t evident in the data (I posted the
March 2013 monthly index numbers earlier) and even GDP growth has been very low at 4.5% in
the quarter ended Dec 2013.

If it took a change like liberalization to fix the downtrend in 1992, will we need a policy
response of that magnitude to fix what seems to be coming our way?

Note:The March 2013 IIP Numbers will be revised twice – once in June 2013 and once more in
August 2013. The problem with IIP numbers has been large revisions in both directions. But
recently, most revisions have only been downward, and I expect the general trend to point to a
new crisis.

Conclusion :

From the above article, I infer that 20 years later, there were large deficits in the economy for
which, government had to borrow from IMF and had to devalue the rupee for handling the
situation. Also, policy of liberalization was introduced to cause increase in industrial production
which was very effective. But now, situation being similar some similar steps should be taken to
maintain equilibrium in the economy.
 Page |8

12 important Industrial Problems faced in India

Foregoing analysis shows that India has made sufficient achievement in industrial development
during the last five decades and has emerged as the tenth largest industrialized country of the
world. But considering the size of the country this development is far from satisfactory.
There are many areas where despite requisite facilities industrial development is either
insufficient or completely absent. The pace of industrial progress has been very slow and the
growth has always lagged behind the target (except in 7th Five Year Plan). Despite industrial
progress self- sufficiency is a distant dream and import substitu-tion a major problem. Under
utilization of existing capacity is another major problem which is due to lack of power, raw
material and demand.
Industry has developed elite oriented pattern. Concentration of economic power in the hands of
few, regional imbalances, sickness of industries, loss in public sector industries, unsatisfactory
labour relations, lack of capital and industrial raw materials, chang-ing policy of the government,
and defective licens-ing policy are some of the problems which are hindering the overall
industrial development in the country. In following paragraphs an attempt has been made to
highlight some of these problems.

1. Unbalanced Industrial Structure

2. Low Demand
3. Regional Concentration
4. Loss in Public Sector Industries
5. Industrial Sickness
6. Lack of Infrastructure
7. Improper Location Base
8. Lack of Capital
9. Shortage of Industrial Raw Material
10. Higher Cost of Production and Low Quality of Goods
11. License Policy
12. Lack of Institutional Organization
 Page |9

Statistical Analysis

Index of Indusrtrial Production in India – Various Statistical Tools

Year Average S.D. COV AGR

2005-06 118.1 20.7 17.6

2006-07 145.6 22.3 15.3 23.3

2007-08 216.2 35.4 16.4 48.5

2008-09 240.6 32.5 13.5 11.3

2009-10 243 42.8 17.6 1

2010-11 278.9 46.1 16.5 14.8

2011-12 267.8 27.9 10.4 -4

2012-13 251.6 34.5 13.7 -6

 P a g e | 10

Average industrial production

average
300.0

250.0

200.0

150.0
average

100.0

50.0

0.0
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
 P a g e | 11

Average Growth Rate of Industrial Production

300.0 60.0

50.0
250.0

40.0
200.0

30.0
150.0 average
20.0 growth rate

100.0
10.0

50.0
0.0

0.0 -10.0
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

INTERPRETATION
Above graphs shows the index of industrial production in India since 2005-06 base year taken as
2004-05 and the annual growth rate since that year. We observe that there was significant growth
in industrial production since 2005-06 but it started reducing after 2010-11 because of high
inflationary rates in the economy. Inflation, both at food and overall level, has remained at an
elevated level for over a year despite the Reserve Bank's tight monetary policy stance. The apex
bank has hiked its lending (repo) and borrowing (reverse repo) rates nine times since March
2010, to rein in the spike in prices1. Due to this step by apex bank, commercial banks increased
their interest rates due to which money supply in the economy reduced and thus affecting the
investment in the economy. This was the main reason for decline in industrial production after
2010-11.

1
Inflation to fall below 8% by July, IIP to decline: IEG
PTI New Delhi, June 05, 2011
 P a g e | 12

FINDINGS AND CONCLUSION

From this project on Growth of Industrial Production in IndiaI find that state of industrial
production, presently, is not good as compared to previous years. From last two years Indian
industries are facing decline in their production which may be due to various reasons like strict
government policies, high inflationary rates, inflation in global economy etc.

Thus we can say that industrial production does not only depends on availability of raw material,
labour and funds for investment but also on other major economic factors. Such factors are
measured in macro-economic level because they affect the economy as a whole and in every
aspect.
 P a g e | 13

BIBLIOGRAPHY

 http://articles.economictimes.indiatimes.com/2011-12-18/news/30531200_1_iip-growth-
iip-data-mining-and-capital-goods

 http://www.france24.com/en/20131112-indian-industrial-output-growth-slower-expected

 http://articles.economictimes.indiatimes.com/2013-11-20/news/44285140_1_acquisition-
bill-land-acquisition-acquire-land

 http://www.firstpost.com/economy/why-cutting-interest-rates-will-have-little-impact-on-
industrial-production-868139.html

 http://capitalmind.in/2013/05/indian-industrial-production-growth-lowest-in-20-years-
second-lowest-ever/

 http://www.preservearticles.com/2012013022074/12-important-industrial-problems-
faced-in-india.html