Anaemic revival

With the November data for the index of industrial production showing an output increase of only 0.5 per cent, the lowest since June 2017, it is hard to say that Indian industry is posting a strong recovery. While there can be no denying the base effect, with IIP growth in November 2017 coming in at 8.4 per cent, there are some disturbing pointers to contend with. Automobile output fell by about 20 per cent in November to just over two lakh units (possibly also because of an adjustment to the new emission standards), while steel output hit its lowest level in about a year. The decline in cement output in November could be seen as part of a cyclical pattern in the industry where output spikes once every three or four months. Nevertheless, April-November IIP growth at 5 per cent is not an encouraging improvement over the 3.1 per cent increase in the same period in 2017-18. It is at odds with the CSO’s projection of 8.3 per cent growth of manufacturing in 2018-19, against 5.7 per cent in 2017-18. While the slump in the production of consumer goods and capital goods in November, reversing the general uptick this year, could just be a blip, the fact is that just 10 of the 23 manufacturing sectors tracked by the index recorded growth this month. The Centre needs to keep a close watch to ensure that growth in manufacturing does not hit a roadblock. The rise in capital formation, by all indications being led by public expenditure, needs to be sustained. For the share of manufacturing in GDP to rise from current levels of 16.6 per cent, the sector needs to consistently outpace GDP growth.

The Monetary Policy Committee needs to take cognisance of the fact that it has been over-forecasting retail inflation. With CPI inflation at 2 per cent, the lower band of its target, the MPC should consider relaxing its rather hawkish stance, which has translated into higher real interest rates. This is likely to impact rate-sensitive sectors such as housing and consumer durables. The liquidity squeeze arising out of the NBFC crisis is likely to have impacted demand, along with rural distress. With private infrastructure investors still mired in debt, the government will have to step up investment. The Centre has done well in easing supply side constraints, through measures such as the Insolvency and Bankruptcy Code and the introduction of GST. It is also keen on damage control with respect to MSMEs. However, the demand constraint emanating from the rural economy cannot be overlooked.

The issue of reconciling the IIP (now with an improved base, but still beset with under-reporting errors) with the MCA 21 projections of the CSO should be addressed. If the first is prone to volatility, the second could appear a trifle optimistic. Some data clarity would provide a better idea of where the economy and industry are headed.

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