A dilemma's horns

Industrial production, inflation the twin constraints on recovery

Two pieces of economic data released on Monday encapsulate the size of the economic problems that would face India's new government to be formed next week. The two together represent the horns of a dilemma, one that the next government will need ingenuity, courage and hard work to escape from. On the one hand, industrial production has continued to stagnate. The index of industrial production (IIP) for March 2014 was 0.5 per cent lower year on year. This completes a year of stagnation for India's industrial sector, in which industrial output, as measured by the IIP, contracted by 0.1 per cent in the year from April 2013 to March 2014. But reviving industry will not be easy. The question is one of an investment fall-off. Many companies complain that they are being squeezed by the high cost of capital, and that is why they are failing to invest. But how will that be remedied, given the other piece of data - the other horn of the dilemma - that also came in on Monday? Consumer price inflation, far from moderating, is at a three-month high. For the month of April 2014, consumer price inflation was 8.59 per cent year on year, as compared to 8.31 per cent for the month of March. As long as inflation continues to be so far out of the Reserve Bank of India's comfort zone, the central bank will be unwilling to cut interest rates. And without a rate cut, many manufacturers claim that no revival is possible.

The inflation numbers, therefore, deserve closer scrutiny. Once again, it is food prices that are driving an increase in the general price index. The government's continuing inability to remedy food price inflation will be no small contributor to the Congress' likely defeat in the general elections. Most notable, however, is that fruit and vegetables are the worst offenders, with vegetable prices increasing 17.5 per cent year on year in April, and fruit prices 21.7 per cent. Intriguingly, rural vegetable inflation was almost double that in urban areas, which was only around 11 per cent. What is worrying, however, is that inflation in the price of cereals continued to be around 9.7 per cent in April. This is in spite of the fact that the government is sitting on vast stocks of grain. It is mystifying why the ministry of consumer affairs, food and public distribution has not yet worked out a way to disburse India's vast grain stockpile in such a manner that the price pressure on consumers is reduced.

The IIP for March, meanwhile, shows that the slowdown is deeply entrenched. It is true that these numbers are for the period before the recent relaxation in the mining ban, and thus mining is shown as having contracted by 0.4 per cent. But there is little hope elsewhere in the index for a swift recovery. Most notably, the year-on-year growth rate in the index for intermediate goods was practically zero, and capital goods production shrank by 12.5 per cent. The investment slowdown, clearly, will be with India for some time yet. It is important, thus, to remember that optimism about the continuing high fixed investment rate in the national accounts may be misplaced. The productivity of that capital has fallen sharply, given stalled projects. That may be the first thing a new government should address.