After figures for the November 2012 index of industrial production, or IIP, were released last month and showed industrial output contracting by 0.8 per cent as compared to November 2011, it was widely expected that December would see a reversal of fortune, with some sort of increase in industrial production heralding the long-promised turnaround in the India growth story. These hopes have now been summarily dashed by the Central Statistics Office, which has released figures for industrial output in December 2012. The overall index, according to those figures, fell 0.6 per cent compared to the previous December — driven by a 0.7 per cent fall, year-on-year, in manufacturing output. The immediate point to note is the context. These figures for the IIP come in the wake of advance estimates of gross domestic product, or GDP, that suggested that India would grow only five per cent this financial year. These numbers were quickly rubbished by the finance ministry, which pointed out that they essentially extrapolate from the year to November to come to conclusions about the whole year’s growth — and if India has bottomed out, and is back on its way up, the five per cent prediction wouldn’t catch that if it’s a product of simple extrapolation. But the IIP figure pokes a hole in that optimistic story. Simply put, there’s no recovery in sight, according to these figures. Instead of criticising India’s statisticians – after all, those in charge of economic policy making in New Delhi have had a very bad track record over the past few years in terms of predicting growth – it would be better if top policy makers owned up to the size of the problem that faces the Indian economy.
Looking at the industry numbers, it now becomes amply clear that this is a much more broad-based decline than in the past. Earlier, consumption had stood up to the headwinds of the global crisis and low investment, and the sectors that depended on final consumption could be relied on to prop up industrial and other growth. That consumption story has been eroded, presumably by persistent and high consumer inflation, driven by fuel and food prices. For the first time this fiscal year, both consumer durables and consumer non-durables actually showed a contraction in output year-on-year — consumer durables by a whopping 8.2 per cent, and non-durables by 1.4 per cent. A combination of tough monetary policy, high inflation and lower expectations of future growth has effectively entrenched demand destruction.
The question is: what does this imply for the 2013-14 Budget, which is now in an advanced stage of preparation? One simple point is that observers, in India and internationally, will view any growth projections that assume the Indian economy has already bottomed out with considerable scepticism. Any such projections must be very realistic if the government is not to further dent its credibility. The second point that must be kept in mind is that consumption will not come to the government’s rescue any more. In other words, investment must be immediately stimulated and a credible fiscal deficit reduction plan put in place. This must be a focused, pro-investment Budget if any turnaround is actually to materialise, even in the medium term.
