India's Index of Industrial Production, or IIP, fell by 2% in December 2008, due to a significant fall in the growth of manufacturing, consumable durables and intermediate goods. The factories are getting closed and thousands of workers are laid off. In US and UK too the industrial production fell in the last three months by 3.6% and 4.4% respectively. The situation is much worse in the countries more dependent on manufacturing sector exports. The Economist points out that "Industrial production is volatile, but the world has not seen a contraction like this since the first oil shock in the 1970s—and even that was not so widespread"
Thus when the US and European system is busy in bailing out the banking and the financial system, the manufacturing sector is still sinking. This problem can further worsen the macroeconomic crisis since the manufacturing sector is the one that provides a major chunk of employment and thus hundred and thousands of job losses in the manufacturing sector can lead to a reduction in the service sector spending by the workers and thus initiating a downward spiral.
However the reason why manufacturing sector is sulking is because of lack of demand. Thus a direct aid to the sector does not solve the problem and only a tax benefit for the consumers if they consume the sector's product (or something of that sort) can actually provide any material benefit for the sector. Something like cutting the service tax from 12-10% (just announced by India's fin min)
Hence, I strongly believe that the global policy makers should start providing material aid to the ailing manufacturing sector and for the time being remove their attention from the BANKING if they really want to save their economies.
No comments:
Post a Comment