IIP, inflation trends call for drastic steps

Industrial output data reveals that the manufacturing sector continues to be in trouble

Last Friday, the Central Statistics Office released two sets of monthly data - one for industrial output growth in December 2015, captured through movements in the Index of Industrial Production or IIP, and the other for retail inflation in January 2016, as reflected in changes in the Consumer Price Index or CPI. For December 2015, the IIP number showed a decline of 1.3 per cent over the same month of 2014 - the second consecutive monthly contraction in industrial output after the 3.4 per cent fall in November. The CPI number for January 2016 was less disturbing as retail inflation was 5.7 per cent, a tad higher than the 5.6 per cent rise in CPI seen in the previous month and 5.2 per cent in January 2015. Both the numbers have come barely a fortnight before the Union Budget for 2016-17 is due to be presented. Their sombre implications, therefore, should not go unnoticed by those deciding which policy measures would extricate the economy out of a continuing decline in industrial output, even as retail inflation has been rising - though at a mild rate, staying within the comfort zone outlined by the Reserve Bank of India (RBI).

A closer look at the data for industrial output reveals that the manufacturing sector continues to be in trouble, contracting by 2.4 per cent in December - maintaining the declining trend that was first seen this financial year in November, with a contraction of 4.66 per cent. The green shoots of recovery that many had witnessed in over five per cent growth in the manufacturing sector in the first seven months of 2015-16 seem to have disappeared, with the cumulative growth figure for this sector in the April-December period decelerating to 3.1 per cent. The contraction in December has been fairly widespread with as many as 10 out of the 22 industry groups within the manufacturing sector showing a decline in output, led by electrical machinery with a contraction of over 44 per cent. What is more worrying is that the capital goods sector, which indicates investment demand in the economy, saw a contraction of 19.7 per cent, bringing the sector's cumulative output growth to less than two per cent in the first three quarters. There was no significant respite from demand deficiency either, as the consumer non-durables sector contracted by over three per cent in December and by one per cent for the first nine months of 2015-16. Prime Minister Narendra Modi has promised more tax reforms and easier norms to attract more investments. The forthcoming Budget will have to take this agenda forward and look at more measures to revive demand and investments.

Retail inflation in January stayed within the band stipulated by the RBI, but food inflation within the overall basket maintained a rising trend; the overall trajectory needs to be kept under watch before the government can heave a sigh of relief on this front. The central bank's monetary policy stance will be influenced by any further upward movement in retail inflation, which could dampen the prospects of an interest rate cut in its policy review in the first week of April. The government's fiscal consolidation road map, to be revealed on February 29, will thus be even more critical, making continued adherence to targets of fiscal correction a bigger priority.