Industrial Growth and Inflation Scenario - CSO

Why in news?

Recent data from the Central Statistical Office (CSO) indicates a slowdown in industrial growth and an increase in inflation numbers.

How is the industrial growth?

Growth in the Index of Industrial Production (IIP) slowed in February, 2019 to 0.1% (a 20-month low) from 1.44% in January.
An across-the-board slowdown, especially in key sectors like manufacturing, mining, capital goods, and infrastructure has driven this.
Within the Index, the mining and quarrying sector saw growth slowing to 2% from 3.92% over the same period.
The manufacturing sector (with a weight of almost 78% in the index) saw a contraction of 0.31% in February from 1.05% in January.
The largest contributor to the slowdown in February was the capital goods sector.
The sector continued its contraction in February by 8.84% compared with a contraction of 3.42% in the previous month.
Growth in the infrastructure sector slowed to 2.38% from 6.8%.
The electricity sector was the only sector that saw an acceleration in growth; 1.18% in February compared with a growth of 0.94% earlier.
The consumer non-durables sector also saw growth quickening, to 4.3% from 3.33% over the same period.

What is the inflation scenario?

Retail inflation, as measured by the consumer price index (CPI), has gone up in March, 2019 to a five-month high.
It has increased to 2.86% in March, 2019 from 2.57% in February.
It was largely driven by the speeding up of inflation in the food and fuel sectors.

Inflation in the food and beverages segment of the CPI quickened to 0.66% in March compared with a contraction of 0.07% in February.
Inflation levels in all the other segments of the CPI came in lower, however.
So overall inflation is still well below the average threshold of 4%.

How is the overall economic scenario?

GDP grew by just 6.6% in the quarter ended December, the slowest pace in six quarters.
Other economic indicators such as the purchasing managers’ index and automobile sales are also signalling weakening momentum. Click here to know more.
So the overall scenario, when viewed along with industrial output slowdown, suggests that a turnaround in economic growth is not in sight.
Various institutions such as the RBI and the International Monetary Fund have been lowering their expectations for India’s growth in the coming quarters.

What is to be done?

The downturn in industrial activity and the spike in retail inflation clearly pose a policy challenge.
On the fiscal side, the prospects are limited as both direct and indirect tax revenue collections have shown a shortfall compared to the revised estimates.
But to meet the 3.4% fiscal deficit target, the government seems to be curtailing expenditure in general, and capital expenditure in specific, which is not a healthy trend.
So the outlook should be thought of in terms of stimulating investment demand in the economy.
On the monetary side, steps have been taken through two successive rate cuts by the Reserve Bank of India.
But beyond this, policymakers should also look into the structural issues behind the slowdown.
The high levels of troubled debt in not just the banking sector but the wider non-banking financial companies are hurting credit markets.
Notably, to a large extent, the slowdown is due to weakening investments as the credit cycle tightened.
Easing interest rates without reforms may only help hide investment mistakes instead of fostering a genuine economic recovery.
So addressing the structural issues is essential to fully reap the benefits of any rate cuts by the RBI and make an effective stimulus.

Source: The Hindu

Author: Shankar IAS Academy Trichy