Economic Recession and Industries

In this article we will discuss about the impact of economic recession on industries and stimulus packages to revive Indian economy.

Impact of Economic Recession:

After attaining industrial recovery during the Tenth Plan period, the country again started to face an industrial slowdown in 2008-09 as a result of global economic recession. The CSO estimates for 2008-09 shows that the industrial sector attained a growth rate of only 2.5 per cent as compared to that of 11.6 per cent and 8.5 per cent growth rate recorded in the corresponding period of 2006-07 and 2007-08 respectively.

But the same growth rate further come down to mere 1.1. per cent in 2012-13. This simply shows that Indian industrial sector has started to face the brunt of global economic recession which is likely to deepen further in the coming months if effective measures are not taken.

Global recession has resulted fall in the income level arising out of slower economic growth rate followed by slump in the aggregate demand for good, deriving both from internal and international market.

The global crisis has seriously affected some of our export- oriented industries like-automobiles, leather, electronics, diamond jewelleries, ready-made garments, handicrafts, textiles, machinery industry etc. seriously. As a result, some of these industries have already declared cut in production, temporary suspension of work, laying off workers etc.

India’s export oriented leather industry employing 2.5 million people would be forced to lay off around 5.0 lakh workers in the next three to four months with the worsening scenario in United States and Europe. Similar threat is apprehended in vehicle industry, diamond industry, garment industry etc.

India’s exports fall for the first time in seven years by 12 per cent in October 2008 as a result of sagging demand from the world’s two biggest consumer markets—the US and Europe which would widen the trade deficit further.

Impact of the economic recession has also been felt in terms of job losses in different industries. Industry Department has estimated the impact of job losses to the extent of 5.0 lakh in the handicraft sector and another 5.0 lakh in the textiles sector in the coming months.

The Labour Bureau of Ministry of Labour and Employment recently conducted a survey on the effect of economic slowdown on employment in India. A sample size of 2581 units covering 20 centres across 11 states was taken up for the survey.

Eight major sectors like textiles and garment industry, metal and metal products Information Technology and BPO, automobiles, gems and jewellery, transportation, construction and mining industries were included in the survey.

All eight industry sectors had experienced an average decline in earnings by 3.45 per cent during October and December 2008. Overall capacity utilization had reduced by 1.32 per cent per month during the period with automobile sector witnessing a monthly decline of 7.05 per cent.

Total employment in all these eight sectors had come down from 16.2 million in September 2008 to 15.7 million by December 2008 showing a total loss of 5.0 lakh jobs during this three month period. Although job losses are a matter of serious concern for our country but there is a silver lining too.

A recent survey conducted by H.R. consultancy firm Hewitt observed that less than 13 per cent companies in India were considering retrenchment while 60 per cent companies are still hiring workers. Thus India is at the bottom of the ladder of layoffs with the US topping the list with 55 per cent followed by China at 30.6 per cent.

The countries like Japan, Korea, Singapore and Malaysia and also put at higher stage at the ladder of lay-offs.

However, the scenario of layoffs would be much more serious in the coming months. According to the latest study made by Citi group, the country does not appear to have remained unsheathed from the massive layoffs witnessed throughout the world and the extent of unemployment could rise further with the home coming of migrant workers or declining remittances from abroad.

The report furthers stated that although there was a loss of 5.0 lakh jobs during the three month period (Oct-Dec, 2008), with export oriented sectors such as gems and Jewellery, autos, and textiles being most impacted but this statistics only covers the organised sectors which comprises just 10 per cent of the country’s workforce close to 385 million.

Although India’s unemployment rate is officially, stated at 8.2 per cent but the extent of disguised unemployment prevailing especially in rural areas can magnify the problem into serious proportion. As a result global recession, the overall growth rate of Indian economy has come down from 9.0 per cent to 4.5 per cent in 2012-13.

The key to revive the economy rests on raising the aggregate demand for various goods and services which in turn revive the condition of Indian industries.

Stimulus Packages to Revive Indian Economy:

In order to revive the economy from continuous slowdown, the Government of India has already announced some measures in the form of stimulus packages. As a part of its first stimulus package unveiled on December 7, 2008, the Government has already given Rs 20,000 crore of additional funds for the infrastructure sector.

In order to reverse the economic slowdown, the government announced its second stimulus package on January 2, 2009 seeking to raise public spending and making available credit easier for sectors like export, housing and small industries.

Simultaneously, RBI also slashed key policy rates and ratios to pump in an additional Rs 20,000 crore into the banking system in addition to signalling a soft interest rate regime. As a part of second package, the Central Government has decided to inject Rs, 75,000 crore for the infrastructure sector projects with a view to arrest economic slowdown.

Here the focus in given on utilisation of refinance facility extended to India Infrastructure Finance Company Limited (IIFCL) which is expected to leverage Rs 30,000 crore it has been allowed to raise from tax free bonds and provide about Rs 75,000 crore to projects in the infrastructure sector.

The second stimulus package also reduced excise duty by 4 per cent which would relieve the industry sector and would help to raise the overall demand for various industrial goods. However, the twice packages announced both by the government and the RBI is considered insufficient to boost the sagging economy as the farm sector’s concerns were not addressed to.

Again on February 24, 2009, the government while tabling the Interim Budget 2009-10, announced a 2 per cent cut in Excise Duty or Rs 60 per metric tonne of bulk cement whichever is higher and reduced the general rate of Central Excise Duty from 10 per cent to 8 per cent and also announced extension of 4 per cent cut in Excise Duty provided in the stimulus package beyond March 31, 2009.

Besides, the Finance Minister also announced a 2 per cent cut in service tax to bridge the gap between Excise Duty and service tax to restore confidence in the service sector. This entire budgetary package would cost centre about Rs 30,000 crore as revenue loss.

Thus the fiscal and monetary measures taken under the stimulus packages are targeted to increase liquidity for pushing up demand, addressing the concerns of the industries and provide incentives to exporters that have been seriously hit by the recessionary conditions.

The first objective is aimed to be met by reducing key interest rates and by cutting CRR which will enable the banks to lend more at lower rates of interest.

The second objective will be met by curbing cheap imports to address the concerns of the industries. The third objective to boost exports is hoped to be met by a twin stroke-increasing duty drawbacks, which the exporters claim against the taxes paid on inputs needed to manufacture the item for export and extend the duration of scheme up to the end December, 2009.

Thus the stimulus packages announced by government, although inadequate, but are right on the line to revive the economy of the country from the current recession and to face the battle against global economic slowdown.

Prime Minister Dr. Manmohan Singh has rightly urged the world economies recently to continue with stimulus packages till 2010 and avoid all kinds of protectionism including in the financial sector to battle the global economic slowdown.

Group of 20 (G-20) Summit concluded in London on April 2, 2009 reached at a consensus in facing the financial crisis and pledged a $ 1.1 trillion package to help restore bank lending, boost economic growth and also to create jobs.

Thus the trend of industrial slowdown is very much apparent from current trend in industrial growth rates. Though the growth of the industrial sector started to face slowdown in the first half of 2007-08, the overall growth during the year remained as high as 8.5 per cent.

The industrial sector witnessed a sharp slowdown during 2008-09 as a consequence of successive shocks, the most important being the knock on effects of the global financial crisis.

The pace of slowdown accelerated in the second half of 2008-09 with the sudden worsening of the international financial situation and the global economic outlook. The year 2008- 09 thus closed with the industrial growth at only 3.6 per cent as per the Index of Industrial Production (IIP).

However, the industrial growth rate (IIP based) recovered to 8.6 per cent in 2009-10 as a result of the recovery of the performance in its manufacturing and mining sector.

Although during the first quarter of 2009-10 the industrial growth rate remained lower at 3.8 per cent but the same growth revived from the second quarter of the year and the industrial sector has emerged as on the prime movers of the current growth process of the country. But the industrial growth rate again declined to 2.1 per cent in 2014-15.