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Rise and fall

Latest IIP and CPI data outlines the policy challenges that lie ahead.

By: Express News Service | Published: January 14, 2016 12:03 am

Two sets of economic data, released on Tuesday, have underscored the tenuous nature of India’s economic recovery. First, industrial production contracted by 3.2 per cent in November — the lowest level in over four years. Much of the blame goes to the weak performance of the manufacturing sector, which saw an across the board slump with 17 of the 22 industry groups in the Index of Industrial Production (IIP) registering negative growth in November compared to the same month in 2014. Worse still, the capital goods output — a barometer of investment — contracted by a remarkable 24.4 per cent in November compared to a growth of 7 per cent in November 2014. Second, consumer price inflation surprised many observers to rise to 5.6 per cent for December, even though it remains within the RBI’s January target level of 6 per cent. The main reason here was the higher food price inflation. Taken together, the data paints a contradictory picture. The anaemic industrial performance would have gone with lower inflation, which is not the case. The fact is that India’s CPI continues to be relatively high and “sticky”, despite the sharp fall in commodity prices globally, especially crude oil. And therein lies the policy challenge — both for the Narendra Modi government at the Centre and Raghuram Rajan in the RBI.

On the face of it, if the government tries to jump-start the economy through higher expenditure, it will further worsen its fiscal deficit, which, in turn, will increase inflation and put pressure on the RBI to raise interest rates. If the RBI, on the other hand, tries to reduce interest rates in order to incentivise economic activity, it may further weaken its grip over the CPI inflation targets it has set itself.

So what should be done? From the government’s perspective, it is the quality of its expenditure that is key. The government must ring-fence capital expenditure. Restarting private-sector investments is vital if India has to make the current growth sustainable. The other challenge is reaching out to rural India, where demand has collapsed. Of course, this will not be easy since India is already struggling to meet its existing fiscal deficit commitments. It is said that in India there has always been a strong consensus for weak reforms. The current slump in commodity prices provides India an opportunity to change that.

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  1. S
    sclahiry
    Jan 15, 2016 at 4:42 am
    The country is witnessing industrial slow down apart from weak rural demand.There has been a sharp drop in private sector investment in the economydia's exports is declining since last 13months or so.The possibility of improvement of India's exports appears to be bleak in the near future.The trend of weak rural demand, lac of private investment and falling commodity prices will continue to stay for sometime now.Further,the production of Rabi crops might get affected due to unfavourable weather condition in North India.Since economic slowdown is continuing,the option before the Govt is stepping up public sector investment in the infrastructure sector till such time private sector steps in.
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