The index of industrial production, or IIP, for October was released on Monday, and showed a dramatic and worrying fall. It shrank by over five per cent, the most that it has in over two years. Manufacturing and mining both reduced output — but the most dramatic fall was reported from capital goods producers, of over 25 per cent. The fall for October comes after September, too, saw a decline in capital goods output. Whether or not the IIP is a relatively volatile series, the magnitude of these numbers should concern policy makers in New Delhi and in Mumbai, and demonstrate certainly that optimism about the economy is misplaced. They also emphatically refute the claim in the Mid-Year Analysis just issued by the Ministry of Finance that momentum was returning to economic growth. If capital goods, the sector that serves as a pointer to where business in general is going, is declining so sharply, then future growth is more in jeopardy than the headline numbers would suggest. The government continues to expect that growth will be at 7.5, or at worst 7.3 per cent; but given the collapse in manufacturing and capital goods output, that begins to appear a distant dream. How miraculous does the government expect the second-half recovery to be, for the economy to record seven per cent-plus growth over the entire year?
There is little comfort to be had from decomposing the index. Factory output fell by six per cent; mining by 7.2 per cent. Both sectors posted comfortable, if not outstanding, numbers for growth last October. They then declined in November 2010, so this is not just a seasonal dip that has been exaggerated. And, further, the only sector really pushing up the main IIP number is power, which grew by 5.6 per cent. But that is clearly unsustainable: if mining, which provides the sector’s inputs, is collapsing, as is manufacturing, which consumes its output, where precisely is the growth in electricity generation going to come from? While these numbers are scary in themselves, what makes them even scarier is that policy makers seem to be unable to either anticipate them or respond effectively. Reform of manufacturing continues to be delayed, foreign investors continue to be dismayed by an unfriendly administrative and policy climate, and mining continues to be bedevilled by political waffling.
This sign of collapsing output and of shrinking investment also arrives as the Reserve Bank of India (RBI) is planning its mid-quarter policy review, due on December 16. Many analysts believe that the RBI will signal a pause, neither tightening nor loosening monetary policy. But doing nothing is becoming an increasingly questionable decision. The RBI has raised rates 13 times since March 2010, while acknowledging the relative ineffectiveness of monetary policy in tackling cost-push inflation. Now, high rates have caused producers to put expansion and growth on hold. Clearly, there is need for a more open debate on the RBI’s tardiness in altering its policy stance. And, more immediately, the case for a rate cut to rescue growth strengthens daily.