Millennium Post

Indian economy loses heat

The index of industrial production released on 12 February along with last week’s estimates of GDP growth rate in 2012-13 and the inflation rate announced on Tuesday give insight into what is happening to the Indian economy. The three sets of figures show beyond doubt the serious slow down in the economy when prices are still rising. We are therefore caught in a situation when there is overall slack in the midst of rising prices – the worst combination to be in.

The IIP figures for December released on Tuesday confirm that the industrial sector is persistently contracting and the figure vindicates the estimates of the CSO about GDP growth. It may be recalled that the CSO released GDP estimates for 2012-13 stating that the overall growth should be at 5 per cent, which was lower than the estimates of the union finance minister as well as the Reserve bank of India. IIP which accounts for around 22 per cent of GDP will have a major bearing on the overall GDP growth and a depressed IIP should bring down the overall growth rates.

No sooner had the CSO figures become public, there was widespread suspicion that the estimates were not reliable. The finance ministry had stated that the GDP estimates were a extrapolation on the basis of the first half of the year and there had been a remarkable improvement lately which was not taken into account. Others similarly questioned the veracity of the figures.

An economy plagued by inflation, constantly under pressure with contractionary monetary policy followed for over two years on, exports dwindling, hardly any capital investment, industrial sector shrinking and loss in farm sector due to inadequate rains cannot be expected to be exactly flying with high growth numbers.

There is no doubt that the economy has lost heat. Industrial production has been languishing month after month, showing up only occasionally. The figures on capital goods sector and mining and quarrying have been in the negative. On the ground, do we see any fresh investment in industrial plant or in fresh mines? All are locked up in land acquisition problems or environmental clearances and other hurdles. How can mining sector show growth or capital goods production rise in such an atmosphere?

The CSO had earlier estimated an industrial sector grown of 3.1 per cent for 2012-13. However, so far, between April and December industry has grown by only 0.7 per cent, which means that the CSO estimate might prove to be slightly higher if industry does not grow substantially post December. The CSO estimates put services sector growth by 6.65, which is also much lower by its performance earlier. The reduction in growth in Agriculture and Allied sectors has been on account of rainfall being lower than normal, particularly in the months of June-July.

Indeed, it now looks as though India should be lucky if overall growth of 5% is achieved in 2012-13. Coming to the December figures, what is significant is that the consumer durables industry production has declined by over 8%. That means that interest rate hikes have really hit the demand for durables and this is leaving its imprint on the sector. Mining continues to shrink as well. The latest figure is (-)4 per cent and thus will keep pressure on prices of raw materials produced by the upstream industries. In fact, going by December figures there is total gloom in the entire industrial sector with every segment showing a negative growth, excepting some marginal improvement in basic goods.

Coupled with these figures, the release of the CPI on Tuesday shows an increase in food prices by 13 per cent. The retail prices are being pushed up by the hikes in the prices of food items across the board. If anything, these prices are likely to keep pushing up as the winter harvest of fruits and vegetables taper off and the arrivals dwindle.

The overall implication of all these figures is that the monetary policy stance of high interest rate has failed to arrest price rise (food price) while leaving a deep impact on the industrial economy of the country. Stable prices cannot be contained with monetary policy rather by emphasising supply of food items. The food demand is rising as a result prices are going up in the absence of supply side improvement.

What needs to be done? Clearly, there is a policy hiatus between what is happening on the ground and what the policy makers are trying to achieve. A diehard monetarist approach of inflation control by relying on the monetary tools has boomeranged. It has neither arrested price rise, nor has it served the industrial sector well.

This apart, the virtual stalling of all fresh investment activity because of the persistent problems over land acquisition for industrial units, expansion and starting of, particularly mining and metallurgical industries, thereby leading to severe shortages in vital raw materials had hurt the economy. The stalling of these industries and expansion of their production, defected domestic demand into imports and thereby pushed up India’s current account deficit in the midst of a slowdown. (IPA)
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