IIP plunges,but RBI needs to look at other indicators to choose the stance of monetary policy
The sharp contraction,by 3.5 per cent,in industrial production on year-on-year basis has come as a rude shock. While many observers expected growth to slow down,few expected an actual decline in production. However,the IIP data in recent months has been volatile and prone to errors and revisions. The industrial production data is also not consistent with the aggregate sales data of manufacturing firms or with import data. On a year-on-year basis,non-oil,non-gold imports till the end of last year were growing at 20 per cent. The bulk of these imports are raw materials and intermediate goods. So if industry is importing more inputs,but producing less output,it suggests a discrepancy in the data.
The sharp drop in capital goods production by 21 per cent is another shocker. While there has been a slowdown in investment,and new projects announced are fewer than last years,investment has continued in projects that are already underway. With the rupee much weaker than last year,it would not be possible for people to have moved to imports of capital goods,away from domestically produced capital goods,due to price factors.
This data also presents a puzzle. Monetary policy in times of slow growth and high inflation is difficult enough. If,in addition,policymakers are confounded by bad quality data,it becomes more difficult. On one hand,the RBI would not want to cut interest rates with inflation much above its comfort level; on the other,with the IIP showing a contraction,there will be pressure from industry and politicians to cut rates. While we need immense focus on better quality data,in the immediate context,the RBI needs to look at other indicators to choose the stance of monetary policy in coming days.