Troubling data: On falling industrial output

Earlier this week in Parliament, Finance Minister Nirmala Sitharaman spoke about green shoots in the economy. One of the variables she laid faith in was the industrial output data which showed a 1.8% growth in November after contracting from August to October. This faith in a growth recovery proved misplaced as the December industrial output data, out on Wednesday, shows a contraction of 0.3%. This is curious because the core sector, accounting for 40% of the index of industrial production, showed a 1.3% growth in December. The villain seems to be manufacturing, which contracted by 1.2%, with consumer durables and non-durables in sharp decline. This does not square up with anecdotal evidence from consumer durable manufacturers — of seeing a recovery. Be that as it may, what is clear is that the growth impulses are unstable yet and certainly not uniform across sectors. And as luck would have it, even this tentative recovery is under threat due to the coronavirus outbreak in China. The shutdown of factories in China due to this is likely to affect supply chain networks for products from mobile phones to automobiles. Manufacturers in India are reporting slim inventories for critical items of production and if factories do not begin to hum in China soon — the chances of that happening are remote given signs of an intensifying outbreak — it could spell trouble for India.

Meanwhile, inflation continued to hold sway with the January prints showing a rise in both consumer price inflation and wholesale price inflation. CPI accelerated to 7.59% in January, the second successive month of above 7% print, while wholesale price inflation broke the 3% barrier in January (3.1%) moving up from 2.59% in December. The surge in both numbers is largely due to rise in food prices, including of proteins and pulses but core inflation has also moved up to 4.1%. While food inflation may calm down this month following the retreat in vegetable prices, the rise in core inflation is cause for worry. With cooking gas prices rising by a huge ₹144 a cylinder the inflation expectations of households may also go up. Inflation is likely to remain well above the RBI’s median of 4% at least for the next two quarters. The central bank has already paused on its rate cut cycle and going by the latest data it appears that the next rate cut — the last in the cycle — will not happen until later this calendar year. Interest rates are being driven down through other measures and again, it is not as if growth is being held back by high finance costs. Far from it. Banks are reporting poor credit growth because businesses are unwilling to invest. And this in turn, is due to lack of demand. The key to a turnaround is, therefore, in the hands of the consumer.

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