IIP contracts for 3rd straight month: With nosediving growth and high inflation, is economy entering a 'stagflation' phase?

  • On a closer look, almost all components of the factory output continue to be in negative terrain

  • Even more surprising is the fact that consumer durables growth is tumbling despite October-November being the peak festive season in most parts of the country

  • The latest inflation numbers prove the MPC got its assessment right in the last policy when the panel chose to hold rates despite expectations of a rate cut

India’s growth slowdown is deepening. In October, the Index of Industrial Production (IIP) contracted for the third straight month even as the retail inflation inched up in November. In October, the IIP contracted by 3.8 percent compared with a contraction of 4.3 percent in September and 1.4 percent contraction in August. Retail inflation, on the other hand, rose to 5.54 percent in November, compared with 4.62 percent in October.

These numbers show the economy isn’t attempting any recovery so far, despite the several measures announced by the Narendra Modi government to prop up growth, including a steep cut in corporate tax, major disinvestment initiatives and a series of monetary policy rate cuts from the Reserve Bank of India (RBI).

 IIP contracts for 3rd straight month: With nosediving growth and high inflation, is economy entering a stagflation phase?

Representational image. Reuters.

On a closer look, almost all components of the factory output continue to be in negative terrain. Manufacturing segment contracted by 2.1 percent, electricity growth contracted by a massive 12.2 percent, the lowest in seven-and-half years, growth in capital goods segment that reflects the investment activity on the ground plunged by negative 21.9 percent (lowest growth in over six years) and infra/construction sector growth at negative 9.2 percent, again, the lowest in six and half years.

Consumer durables contracted by 18 percent while non-durables shrank by 1.1 percent marking the lowest growth in six and half years at least. Even more surprising is the fact that consumer durables growth is tumbling despite October-November being the peak festive season in most parts of the country.

Remember, the country is nowhere close to a macro crisis such as the case in the early 90s when the currency tumbled and reserves eroded pushing the government to seek International Monetary Fund (IMF) help. What is witnessing right now is complete erosion in consumer confidence and manufacturing activities, credit flow, employment scenario. Neither the government nor the RBI seems to have preempted such a steep slowdown, which necessitates a closer relook at the plan of action to resurrect the economy.

The latest inflation numbers prove the Monetary Policy Committee (MPC) got its assessment right in the last policy when the panel chose to hold rates despite expectations of a rate cut. Going ahead, if the inflation remains sticky, the MPC will have a dilemma on the policy-front. Even when the Consumer Price Index (CPI) inflation rate is approaching the upper band of the RBI, the fact that core inflation remains low shows the slump in demand situation. Core inflation has remained low at 3.38 percent in November, compared with 5.44 percent in the year-ago period. In the recent policy, the RBI had clearly acknowledged the severity of the growth scenario by lowering the FY20 Gross Domestic Product (GDP) growth forecast sharply to 5 percent from 6.1 percent earlier. This signals the pessimism being built up on the growth front, even surprising the central bank’s own estimates a few months back.

“The GDP growth for Q2 2019-20 turned out to be significantly lower than projected. Various high-frequency indicators suggest that domestic and external demand conditions have remained weak,” the RBI said in its policy document. At 5 percent, the RBI joins many private forecasters to dish out among the most pessimistic growth targets for the year.

The combination of growth falling and inflation rising showing overall weakness in the economy signal that the country may be stepping into a phase of 'stagflation' as warned by economists. Clearly, the government needs to wake up to reality and think of a bigger stimulus package to revive the economy. Time for baby steps is gone. Expecting the monetary stimulus to work in an economy facing deep demand slump may further delay the remedy. At this stage, the economy should be the main focus area of the government.

(Data support by Kishor Kadam)

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Updated Date: Dec 12, 2019 20:03:01 IST