Disturbing signs

The sharp fall in the Index of Industrial Production (IIP) to 2.7 per cent in November from 11.3 per cent in the corresponding month of 2009, is a matter of concern, coming as it does in the context of persistent general price inflation and a double digit rise in food price index. It has marked a long-term low and in the last three months the index has disappointed a second time. When the September figures showed a decline finance minister Pranab Mukherjee had said that it was difficult to understand the reasons for the fall. He has now said that the negative trend may adversely affect the economy, which is expected to grow at over 8.5 per cent during the financial year. The worry is accentuated by the fact while the September decline was mainly the result of non-performance of the capital good sector, the latest slowdown is more wide-based.

The explanation for the slowdown in terms of the high statistical base of November 2009 is of doubtful validity. Seasonal factors like the increase in manufacturing activity in the pre-festival season and the slump later may have had some impact but the fall cannot be entirely attributed to them. The fall of 6 per cent in consumer durables output was a big contributing factor and this could be because of the slack in demand caused by high prices and the pressure on purchasing power. That is an indication of the link between inflation and industrial activity. Industrial production is likely to show a slower growth in the next few months compared to the high growth registered in many months during the last year. A continuous slowdown in industrial activity will also naturally have a ripple effect  on other sectors too. The higher cost of capital arising from liquidity problems and increasing interest rates seems to have affected  capacity expansion and infrastructure project execution. This is likely to hit small and medium industrial units and enterprises more than the bigger players in the coming months.

This makes the Reserve Bank of India’s forthcoming monetary policy review both difficult and challenging. It may have to a take a nuanced position which will help to curb inflationary pressures without affecting the availability of credit to sectors that need it to keep the growth momentum intact. The finance minister has also promised correctional measures and these should be taken before the slide becomes severe and goes beyond control.

Liked the story?

  • 0

    Happy
  • 0

    Amused
  • 0

    Sad
  • 0

    Frustrated
  • 0

    Angry