Estimates for July 2012’s industrial production are out and have disappointed even low expectations. The index of industrial production, or IIP, grew 0.1 per cent compared to July 2011. It shrank 1.8 per cent year-on-year in June 2012; thus, altogether, the growth in industrial production between April and July 2012 as compared to the previous year is also 0.1 per cent. Essentially, industry is stagnating. This is in spite of a continuing (relatively) strong performance by the power sector, which grew by 2.8 per cent year-on-year in July, and 5.5 per cent year-on-year for the overall April-July period. Mining and manufacturing, the backbone of industry, both continued to shrink — mining by 0.7 per cent year-on-year, and manufacturing by 0.2 per cent year-on-year, both in July. Manufacturing has contracted for the second successive month. Some bellwether components of the IIP are also noteworthy. Capital goods output, in particular, shrank a further five per cent, taking its contraction in the April-July period to 16.8 per cent. This is clearly a sustained investment collapse. Capital goods output has fallen for 10 of the past 11 months.
The question for many is: what will the policy response be to this full-fledged crisis in manufacturing? Those who argue for a response from the Reserve Bank of India (RBI) are likely to be disappointed. Manufacturing inflation may have fallen, but consumer prices are still increasing at a rate way out of the RBI’s comfort zone. On Friday, inflation numbers will reveal whether the consumer price index is in double digits or not. Meanwhile, RBI Deputy Governor Subir Gokarn has already dismissed concerns about liquidity. Global influences on monetary policy, too, point in the direction of steady domestic interest rates. For one, the European Central Bank’s “Draghi put” – its vow to support the marginal euro zone – is meant to free up monetary resources in those countries for lending, easing liquidity pressures on European banks. And if the US Federal Reserve emerges from its big meeting on Thursday with either a third round of quantitative easing or, as is more likely, some clever variation from Ben Bernanke on QE, it is difficult to see the RBI accepting that liquidity is a problem for domestic manufacturers.
The central bank is more likely to argue that heavy government borrowing has reduced the efficacy of monetary policy. The government is effortlessly managing to miss the targets it set for itself in this year’s Budget; data released recently showed that in the first four months alone more than half the fiscal deficit budgeted for 2011-12 was used up. Nor does there appear to be any great urgency in reining in profligacy. The Cabinet Committee on Political Affairs was supposed to meet to discuss fixing fuel subsidies early this week – total under-recoveries approach two per cent of gross domestic product – but, in another sign of this government’s chronic lack of seriousness, the meeting was postponed. Until the government shows it is serious about reducing the crowding out of private borrowing, it is difficult to see how the RBI can cut rates.