WORST IS OVER but complete recovery eludes

WORST IS OVER but complete recovery eludes
The Economic Times, July 3, 2009, Page 11

SURVEY CALLS FOR EASING CURBS ON FDI, DECONTROLLING SUGAR AND FERTILISER INDUSTRIES, LIMITING PRICE CONTROL TO ESSENTIAL DRUGS & CREATING INTERNET-ENABLED DATA SYSTEM

THE government may ease curbs on foreign direct investment (FDI) and introduce an array of reforms to reverse a decline in industrial growth witnessed in the last two fiscals. An indication to this effect was given in the Economic Survey, presented to Parliament on Thursday. However, the Survey said there were a number of positives such as a revival in power generation, an improvement in cement dispatches and higher credit offtake indicating that the worst may be over for the Indian industry.

The reforms could include allowing FDI in multi-format retail, starting with food retailing, raising FDI limit in defence industries to 49%, decontrolling sugar and fertiliser industry, limiting drug price control to essential drugs and creating an internet-enabled data system to help small and micro businesses, the survey said. It also suggested a review of labour laws to encourage economic activity.

One of the main reasons for the poor performance of the industrial sector over the past year was high raw material prices. In July 2008, Indian crude oil basked was priced at $132 per barrel. The persistent rise of crude prices impacted petro-based industrial inputs adding to fuel cost. An increase in the prices of other commodities, particularly metals and ores, from the latter half of 2006-07 to the second half of 2008-09 also hurt the manufacturing sector. In fact, cost on account of consumption of raw materials rose by as much as 38% and 44% during the first two quarters of 2008-09, compared with 16% and 12% in the first two quarters of the previous fiscal.

A sharp increase in interest costs, especially from the third quarter of 2007-08, also added to the woes of the sector. The country is pinning its hopes of an industrial revival on a fall in raw materials prices. The decline in crude prices, low raw material cost and declining interest rates should help the industry to improve profit margins, which have been under pressure, the survey said. Lead indicators and other related information collected by various research analysts also point to an upward movement in terms of demand and supply, it added.

A sustained inflow of FDI points to foreign investor confidence in the Indian economy. The survey said India, on account of its market size, output generation and prices, would continue to be an attractive destination for foreign investment at a time when most industrial economies are struggling on industrial front.

The survey said that a decline in the number of strikes and lockouts indicated an improvement in industrial relations in the country. During 2008, Tamil Nadu experienced the maximum instances of strikes and lockouts followed by Kerala, Andhra Pradesh and Karnataka. Industrial unrest was concentrated mainly in financial intermediation, textiles, transport, mining of coal and food products. The survey said it was imperative to facilitate the growth of labourintensive industries, especially by reviewing labour laws and labour market regulations. The government, however, has always been cautious about proposing changes in labour regulations as labour is a sensitive issue and all state governments need to be brought board.