There can be no escaping the fact that the dismal factory output numbers for April do not sit well with the buoyant GDP data for the fourth quarter released barely a fortnight ago. The index of industrial production (IIP) for April 2016 declined by 0.8 per cent, and for the year 2015-16 it was up just 2.4 per cent, with manufacturing, which accounts for a weight of 75 per cent in the IIP, growing even less at 2 per cent. The GDP data for 2015-16, however, points to an industrial growth of about 8 per cent, with manufacturing growing at 9.3 per cent. What confuses matters further is that the IIP points to a slowdown in industrial growth between 2014-15 and 2015-16 (from 2.8 per cent to 2.4 per cent) whereas the GDP points to an acceleration in manufacturing growth from 5.5 per cent to 9.3 per cent, which would have rubbed off on industrial growth numbers as well even though mining and electricity, as in the case of the IIP, went the other way. Although the IIP is a volume-based metric that only accounts for registered manufacturing units (based on voluntary submissions), and the GDP a value-added measure, there must be a modicum of correspondence between the two. Short-term IIP readings are indeed subject to statistical ‘noise’ but when the overall trend over a year is contrary to that indicated by GDP figures, it is time for the Centre to step in and explain what’s going on. Whether the divergence between the IIP and industrial GDP is due to the wrong deflator being used, under-reporting by the IIP, inaccuracies in the so-called ‘MCA database’, or incorrect estimation of unorganised sector output, remains a grey area. It is time an independent panel was set up to put an end to this egregious confusion.
Data on freight movement by rail and sea, capacity utilisation, inventory levels, vehicle sales, credit growth and velocity of circulation of money should be tracked to arrive at a clearer macro picture. These figures point to a tepid rather than strong growth trend — better perhaps than IIP but less than the GDP growth rate. This is affirmed by a drop in business sentiments in 2015-16, according to the Reserve Bank of India’s industrial outlook survey.
If growth impulses remain an area of uncertainty despite signs of an encouraging monsoon, prices too are starting to climb, with retail food inflation at 7.6 per cent in May and overall consumer inflation at 5.8 per cent. Wheat prices are firming up on signs of lower output in the 2015-16 season. Food inflation should be contained through supply-side measures (apart from medium-term steps to boost output) rather than monetary policy. Its impact on industrial demand cannot be discounted. But above all, the Centre must push capital spending to reverse the downturn in the investment cycle as its top priority, so that its high growth narrative comes true.
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