FE Editorial : Smoking out IIP

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The Financial Express: Nov 13 2012, 03:25 IST

With the order books of most capital goods firms (except for L&T) faring badly, with basic goods growing at under 40% that in the April-September period last year and bank credit growing at just 2.2% in the April-September period (on a yoy basis, it grew around 16%), and exports contracting for the sixth month in a row, it’s obvious the economy is in trouble. But has the IIP contracted 0.4% in September the way the index shows, more so when the PMI has started stabilising? Apart from the obvious contraction in machinery, the real killer is the contraction in consumer goods, by 0.3% in September. While there’s little doubt consumer demand has been hit by rising inflation and a slowing economy, inflation alone would give it some buoyancy. Look for the culprit and you see it’s tobacco products where production is down a fourth in September—the gutka bans in various states may have a role to play, but the larger fall seems more of a base effect since September 2011 saw a huge surge in production. But while it’s true the IIP is exaggerating the fall—the infrastructure index of the IIP has a weight of around 40% and grew 5% in September—there is little doubt there are structural problems that need fixing, ranging from environmental issues to shortfalls in coal production and even bankrupts SEBs.

The biggest area where these structural problems show up in the various datasets released Monday relate to rural consumer prices where the index rose to

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