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Decline of IIP
Context:
India’s factory output, as measured by the Index of Industrial Production (IIP), slowed to 4.2% in June, the lowest since January 2024.
Reasons for slowdown in IIP:
- IIP slowdown was mainly driven by Manufacturing slowdown, which constitutes 77.6% of the IIP, decreased to a seven-month low of 2.6%, down from 5% in May and 3.5% a year ago.
- The capital goods segment, (On the basis of use-base classification) a key indicator of the investment sentiment, showed slower growth.
- Decline in India’s merchandise exports to $437.06 billion in FY24 from $451.07 billion the previous year, reflecting reduced international demand for Indian goods and impacting the manufacturing sector.
- Global Economic Slowdown:The World Bank projects global GDP growth to slow from 5.5% in 2021 to 3.2% in 2023, influenced by reduced pent-up demand post-COVID-19 and the withdrawal of global fiscal and monetary support.
- This global economic deceleration impacts demand for Indian exports and, in turn, affects industrial production.
Impact of slowdown in IIP:
- Employment Impact: The slowdown has resulted in job losses, particularly in sectors heavily reliant on exports.
- For instance, the automobile sector has seen a decline in production due to reduced consumer demand, both domestically and internationally.
- Economic growth is expected to slow, with Q1 FY25 GDP growth projected to fall below 7% due to weaker manufacturing GVA( which is a major component of total GVA).
- Consumer Demand: Mixed performance in consumer goods shows partial recovery in demand, but the contraction in consumer non-durables which reflects fast-moving consumer goods, indicates that inflation and economic pressures are affecting purchasing power.
Way Forward to Boost Industrial Output:
- Policymakers will need to focus on enhancing consumer demand, stabilising supply chains, and fostering a conducive environment for investment to support industrial growth in the coming months.
- Job Creation: Fostering job creation in employment-intensive sectors(announced in Budget 2024) like apparel and electronics can also boost consumer confidence and spending.
- Investment in R&D: The Union Budget 2024 allocated a significant corpus of ₹1 lakh crore for R&D, aimed at fostering innovation in manufacturing.
- Expansion of Production Linked Incentive (PLI) Scheme:The PLI scheme has been expanded to include additional sectors like renewable energy components, textiles, and electronics.
- The government aims to rationalise customs duties on raw materials and intermediaries to enhance the competitiveness of Indian manufacturing.
- This involves addressing the inverted duty structure where finished products have lower duties than raw materials, which is expected to boost local manufacturing.
- Enhancing Credit Availability for MSMEs
- A credit guarantee scheme has been proposed in Union Budget 2024 to facilitate term loans to MSMEs for purchasing machinery and equipment without collateral or third-party guarantee.
- The limit of Mudra loans will be enhanced to ₹20 lakh from the current ₹10 lakh, and MSMEs will get access to credit during stress periods through a government-promoted fund guarantee.
State of Manufacturing Globally:
- The decline in the share of manufacturing in GDP has been a notable trend across both emerging and advanced economies since the 1980s.
- Current Trends: As of recent data, the share of manufacturing in global economic output has decreased from 19% in 1997 to about 16% today.
- The decline has been particularly steep in rich countries, where manufacturing’s contribution to GDP has diminished significantly.
- The global manufacturing sector has shown a strong rebound in 2021 after the initial pandemic-related downturn in 2020, but growth has been declining since then due to various economic challenges.
- The projected growth for 2024 reflects ongoing uncertainties in the global economy, including inflation, labour market issues, and geopolitical tensions.
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