IIP signal: Aam aadmi pissed off, consumer confidence dying

The scariest number to emerge from the latest Index of Industrial Production (IIP) is this: the Indian consumer has given up. And this means the economic pessimism has percolated down from industry to the aam aadmi. Or at least the aam middle class aadmi. The oncoming drought will do nothing to cheer anybody up.

For the fourth consecutive month, the growth rate in consumer non-durables - everyday things like soap, toothpaste, toiletries and food items - had slowed down and in June and fell to a negative rate of -1 percent. The Indian consumer is consuming less, in the belief that he must conserve resources for harder times.

This is more worrisome than the overall dip in the IIP to -1.8 percent for June, down from the previous year’s robust 9.5 percent. For the April-June quarter, which gives a better picture of broad trends, the IIP drop is from 6.9 percent in 2011 to -0.1 percent this year.

Industry has worked itself down to sheer stagnation in the first quarter (Q1).

Clearly, the high growth in 2011 has made this year’s IIP look worse. But this is not the case with consumer non-durables: last year, the rate was a mere 4.3 percent in June, and the negative growth of -1 percent is on even this low base. For the April-June quarter, the drop is from 5.9 percent in 2011 to 0.7 percent this year.

Consumer confidence is clearly at a low ebb.

However, there is a paradox. The consumer durables number (which means things like air-conditioners, TVs, fridges, etc) is actually showing a growth of 9.1 percent in June this year over last year’s lower base of just 1.6 percent growth. Even for the quarter, the rate is 8 percent this year versus 2.7 percent in 2011.

The base effect is throwing up funny numbers, but there is no denying the overall puncturing of consumer optimism. While the June number for the consumer goods category as a whole (which includes both durables and non-durables) is up from 3.1 percent last year to 3.5 percent this year, for the April-June quarter the trend is clearly down: it fell from 4.4 percent to 4 percent.

One reason for the divergence between consumer durables and non-durables could be that the average Indian’s expectations on inflation have gone up. If you think prices are going to go up, you are likely to bring forward your purchases of durables you anyway intended to buy. Just as expectations of taxes on diesel vehicles pushed up diesel cars before the last budget, this is what could be happening in durables. But this need to buy more in the expectation that inflation will be short-lived. If the general expectation is that the outlook for growth and inflation will worsen, people will stop buying durables as well. They will be trying to save more and putting off purchases.

As far as business confidence is concerned, clearly the bottom fell out in June of this financial year. While mining and electricity reported modest to high growth (0.6 percent and 8.8 percent), manufacturing, with a 75 percent weight in the IIP, fell to -3.2 percent. For the April-June quarter, the drop in manufacturing is from 7.7 percent in 2011 to -0.7 percent this year. For the IIP as a whole, it is from 6.9 percent last year to -0.1 percent this year.

The saddest story, of course, relates to capital goods, which has been slipping badly all along. From 17 percent in April-June 2011, it is down to -19.6 percent.

Industry is simply refusing to invest.

So what is the takeout from the June (and April-June) IIP numbers?

Clearly it is not about interest rates being high. One does not buy less toothpaste or pickle because rates are high. One does not buy more TVs or fridges because interest rates are high. The loss of business and consumer confidence is resulting from what the government is failing to do: set the macroeconomy right, and fix the things in the economy that don’t work.

Second, the government’s obsession with survival rather than governance is becoming a problem. Industry is not investing because basic things are not moving in government - coal projects not being cleared, power plants starved of coal, road projects not getting land, infrastructure and other projects being mothballed - and these have nothing to do with taking bold politically-difficult decisions.

The solutions lie not in high-profile decisions like FDI in retail, but in getting ministers to work on nitty-gritty areas like project clearance, raising production, ending environmental roadblocks.

The core problem is not in policy paralysis, but governance paralysis.

On the macro-economic side, the real downer is not just overspending by government, but wrong spending. There is need to shift spending from consumption expenditure (subsidies, etc) to capital goods and investment.

As the RBI said in its July mid-quarter policy review : “Given the deterioration in the fiscal situation, the option of using fiscal policy to stimulate aggregate demand remains unavailable unlike in 2008-09 when the previous period of fiscal consolidation helped to provide the necessary fiscal space….As such, fiscal space would need to be created by controlling revenue expenditure to provide more resources for capital expenditure which could crowd-in private investment.”

The stark message is that UPA-2’s inaction has gored both business and consumer confidence to near death. Chidambaram has to restore this confidence by concrete action on capital spending and not look for easy alternatives like cutting interest rates.