The Index of Industrial Production (IIP) contracted 3.8% in October, as against a healthy growth rate of 8.4% during the same month last year.
Low growth combined with high price inflation has occurred now.
What had happened?
Economic data released by the government suggest that India may be stepping even closer to stagflation.
Industrial output had shrunk by 4.3% in September 2019.
At the same time, retail inflation jumped to a 40-month high of 5.5% in November fuelled mainly by a sharp jump in food prices.
Retail inflation is now in the upper band of the inflation range targeted by the Reserve Bank of India (RBI).
But it might drop as fresh food supplies hit the market.
Why this combination is a concern?
Low growth combined with high price inflation is sure to cause further headaches for policymakers.
Economic growth has declined for six consecutive quarters now, making it one of the longest downturns in recent history.
With inflation raising its ugly head now, the RBI is unlikely to cut rates aggressively in the next few months at least.
So it is entirely up to the government now to find ways to boost growth.
Given the seriousness of the slowdown, the government cannot delay reforms.
What is the government’s explanation?
For a long time, the government maintained that the country’s growth rate was held back by the RBI’s tight monetary policy stance.
But with the benchmark interest rate being cut five times so far this year, the government can no longer shift blame on to the RBI.
The government’s defence right now is that the slowdown in growth is merely a cyclical one that will end sooner than later.
But regardless of the nature of the current slowdown, the Centre has fallen short on its promise of bringing about major structural reforms to the economy.
Except for the recent cut in corporate tax rates, the government has not come up with any other significant reform in response to the slowdown.
Further, the presence of low growth along with high inflation also raises questions about the root cause of the slowdown, which has been attributed to a drastic fall in consumer demand.
Why further rate cuts cannot be a solution?
Aggressive rate cuts by the RBI that have extended over most of the year cannot stop the continuous slide in growth rate.
It may well be that supply-side is also in deep trouble.
Wayforward - The answer to the current slowdown lies in economic reforms that can first lift the potential growth rate of the economy.
Otherwise, further rate cuts by the RBI will only add to the government’s troubles by stoking inflation in the wider economy.
Source: The Hindu
Quick Facts
Index of Industrial Production (IIP)
The IIP is a composite indicator measuring changes in the volume of production of a basket of industrial products over a period of time, with respect to a chosen base period.
It is compiled and published on a monthly basis by the Central Statistics Office (CSO) under the National Statistical Office (NSO).
It is published with a time lag of six weeks from the reference month.
