FE Editorial : Smoking out IIP

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SummaryWith the order books of most capital goods firms 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, and exports contracting for the sixth month in a row, it’s obvious the economy is in trouble.

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 10% in October—8.2% if you exclude both food and fuels. While there’s a larger issue here of a year’s lag in core inflation falling after a fall in GDP growth (http://goo.gl/WrLD7), there is enough evidence to show inflation is influenced by both rising MSPs as well as higher spend on programmes like MGNREGA—that means while RBI needs to do its thing, the greater burden lies on the central and state governments. In the case of trade, the contraction in exports was to be expected, what comes as a surprise is the 32% hike in oil imports, though this appears more a one-time thing due to refineries building up inventory. The larger issue, of course, is that with a large current account deficit, the rupee remains vulnerable, and it doesn’t help that the share of short-term debt in total forex reserves is rising steadily.

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