Bleak numbers

The latest industrial production numbers paint a somewhat bleak picture of the Indian economy, even though it remains a better long-term bet than other emerging economies, China included. A 3.2 per cent slide in the factory index for November 2015, after a 9.8 per cent spurt in October, should not come as a surprise to those familiar with such “analytically bewildering” swings, to quote the former RBI governor, D Subbarao. Yet, the index of industrial production reveals a trend that cannot be ignored. For instance, it is difficult for the ‘fastest growing economy’ to draw comfort from the fact that the IIP has risen 3.9 per cent this fiscal year, against 2.5 per cent last year. Worse, private investment is stuck in a rut. Besides, it is not the IIP alone that is “bewildering”. The GDP data point to a manufacturing output growth of 8.2 per cent in the first half of 2015-16, double the IIP growth rate. If the performance of 2,711 ‘non-government, non-financial listed companies’ cited in the Centre’s mid-year review is anything to go by, the IIP this time seems closer to the truth: sales have contracted over three consecutive quarters ended September last year. Since the review acknowledges “mixed signals with indicators not always pointing in the same positive direction”, it is important to probe the issue further. The earlier criticism that the new GDP series overstates manufacturing output needs to be revisited, and the air cleared once and for all.

As for prices, retail inflation at 5.6 per cent in December 2015 is now on the rise for five straight months owing to vegetables and pulses inflation in particular, a situation that may persist if the rabi crop is weak, thanks to dry weather and a very mild winter so far. However, the bigger picture is one of an economy beset by deflation. The wholesale price index has been negative for a year, which indicates poor industrial demand, besides falling commodity prices. Negative inflation and ‘high growth’ cannot be easily explained, just as falling exports and sluggish investment do not point to buoyancy. The puzzle deepens in the absence of reliable jobs data, something the Centre must lay more stress on. Consumption may not spur growth for long in such a situation. Food prices need to be dealt with as a supply constraint, as they can impinge on disposable incomes and hurt overall demand.

Nevertheless, the 10 percentage point divergence between retail and producer price indices suggests a latent growth problem and the need for an accommodative monetary and fiscal policy. The Budget is being framed for a year that may see lower world growth than in 2015-16. Falling commodity prices could trigger debt defaults, bankruptcies and political stress in commodity exporting countries. Investors may prefer to hold US treasuries, gold and low-risk bonds over equities. India is still in a sweet spot, given this grim scenario. Its twin deficits are under control and its currency stable in times of competitive devaluations. A Budget that focuses on public investment can usher in real change.

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