It's time to devise innovative, short term policies to spur consumption, from lowered taxation to improved GST refund rates
Last Stand at the Bridge for Manufacturing
At the risk of deploying too classicist a reference, one is reminded of the heroics of Horatius, as he defended the siege on Rome. Well, the siege of a dipping IIP is upon us, and the Make in India campaign calls upon those twin comrades – capital and markets – to hold down the fort.
Let us examine the siege, and the missing comrades in turn. The Index of Industrial Production or IIP has been experiencing a steady decline for the past five years, and save a brief surge in 2Q17 of 5.8% (driven by a manufacturing uptick of 7%), it has hovered around the 4% mark.
During the current year 2019-20 (April-November), it grew at 0.6% as compared to 5.0% in the corresponding period of the previous year. Manufacturing in India has been taking a particular hit: the gross value added (GVA) for manufacturing has been declining in comparison to the overall industry: from a high of about 10.8% manufacturing GVA growth in 2015-16 against an industry GVA growth of 8.8% to 2% against 2.5% now.
This paints two pictures: that of the declining contribution in value addition of industry overall, and within that, the shrinking contribution of manufacturing. Manufacturing’s contribution to employment growth has also been declining, with certain quarters of net job losses thrown in the mix as well.
Despite the administration’s stated call to arms and the launch of initiatives like Make in India, and Invest India, what has been failing us? The answer is simple: the twin comrades have failed to join the assembled party at the bridge.
Comrade one – capital – has been missing in action for the past 5 years, and growth capital continues to remain anaemic. This problem found its roots with the NPA crisis of 2015-16, which began showing its effects in 2017-18. With impaired balance sheets and write-downs abounding, debt for expansion became harder to get.
Risk-averse banks preferred to lend to NBFCs, in effect outsourcing the credit decision-making and the risk of bringing on bad debt. The effect was a net increase in the cost of capital as the NBFCs lent to the same MSMEs, albeit extracting a cost for the added layer they had just created. That party too has not come to an end with a rising number of NBFCs confronting the bad debt on their books.
Problems in debt capital aside, the other kind of capital for growth – equity – has remained almost entirely missing from the march. MSMEs in manufacturing have scant options when it comes to raising equity, partly because of an almost absolute absence of growth equity funds in India that cater to manufacturing.
Add to that the fact that China has an unassailable lead when it comes to manufacturing in most sectors, particularly tech, going long on an early technology in the absence of an enabling ecosystem around it feels foolhardy to most investors. That’s the reason most manufacturing startups in India – say those making drones – fold up or pivot towards a services-based model instead.
And that brings us to comrade number two: consumption. Consumption has held its own at the gate, although it is tiring and showing signs of fatigue. Much of the online consumption we see is a function of investor pumping in literal billions to buoy demand.