Stuck in neutral

Industrial production, imports show domestic demand drying up

The index of industrial production (IIP) numbers for January 2014, published on Wednesday, showed that industry was still stagnant. Production grew by a minuscule 0.1 per cent over January 2013, a hair's breadth better than the revised 0.2 per cent estimated for December. More importantly, manufacturing, accounting for almost 80 per cent of the index, declined by 0.7 per cent. Looking at the different use-based segments within manufacturing, both capital goods and consumer durables, reflective of long-term spending commitments by businesses and consumers, declined in January - the former by 4.2 per cent and the latter by an even more dismal 8.3 per cent. As regards individual industries, several major ones like basic metals, fabricated metal products and transport equipment showed declines. With the January numbers in, the growth rate for the 10 months of the current year now stands at a round zero. External or domestic, monetary or fiscal, political or economic - all factors have combined to keep industrial activity stagnant during the year.

Domestic demand sluggishness aside, there was some hope in recent months that the increasing stability in the US and European economies, a recovering Japan and, importantly, a sharply lower rupee would cause exports to accelerate and also imports, being more expensive, to shrink. For the past few months, this is indeed the pattern that has been observed. However, the February numbers for merchandise exports and imports, which were published earlier this week, reveal some worrying patterns. Exports declined by 3.7 per cent in dollar terms, year-on-year. If this reversal persists, it would suggest that the benefits of the lower rupee have, rather quickly, been offset by rising costs of labour and other inputs. Competitiveness cannot be sustained by a cheaper currency alone. But more striking is the pattern shown by imports. These declined by a significant 17.1 per cent in dollar terms on a year-on-year basis. This takes the cumulative decline in imports during the April-February period to 8.7 per cent from the corresponding period last year. Much has been made about the sharp reduction in gold imports over the past few months and this has certainly contributed to the shrinkage in imports. However, it cannot explain such a large decline; apparently, even after accounting for rupee depreciation and gold, the fall reflects significant domestic demand compression.

Projecting from these numbers to IIP outcomes for February, it would be reasonable to expect that lower exports directly and lower imports indirectly will further reinforce the stagnation that the current year so far has seen. While the consumer price index (CPI) numbers for February, also published on Wednesday, show some moderation in headline inflation, this is almost entirely due to a significant softening of food, particularly vegetable price increases. Core inflation, though a bit lower than in the previous month, is still high enough for an inflation-targeting Reserve Bank of India (RBI) to ignore. Monetary policy, therefore, is likely to continue sitting on the bench as far as the growth game is concerned. The economy is heading into the elections in neutral gear; neither the government nor the RBI will provide any stimulus. With currency competitiveness apparently eroding and fears of a bad monsoon emerging, shifting into reverse gear is indeed a real threat now.