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Economy Dec 12, 2012

Don’t be fooled: IIP numbers don’t tell the real story

By R Jagannathan

The Index of Industrial Production (IIP) zoomed by an unexpected 8.2 percent in October, giving analysts reason to cheer. Is India's growth slowdown bottoming out?

It's too early to bring out the bubbly. The cheering should be muted because these numbers should not be seen in isolation. They constitute a silver lining, but the cloud is very much there.

First, the sharp rise in IIP is largely due to two factors: the base effect, where the October 2011 IIP was very low (the lowest in the whole of 2011-12); and the fact that we had an extended festival season this year in October-November, which boosted factory output and sales.

Second, even though capital goods growth shows a perky 7.5 percent, once again this is on the poor base of 2011 - which was the lowest that year. Worse, the capital goods index for October is lower than the September 2012 number by 3 percent. Thus, sequentially the index is still declining even though it looks good compared to October 2011.

Third, the IIP jump in October should be seen in the context of the sharp and continuing deterioration in export demand. The November figures released yesterday show the seventh continuous month of decline in exports, dropping 4.17 percent when imports rose by 6.35 percent. The trade deficit for April-November 2012 is now even higher than last year's figure of $122.6 billion at $129.5 billion. Our current account crisis continued and could again be 4 percent of GDP this year.

As long as the GDP growth story is led by consumption demand and not investment demand, the slowdown will not reverse. Picture by Naresh Sharma/Firstpost

Fourth, the Indian economy is being pulled by the consumer - with consumer durables and non-durables growing by 16.5 percent and 10.1 percent in October.

Add the fact that imports are rising faster than exports, and the same consumption story emerges. It is our consumption that is keeping industry in business, not investment (capital goods fell 11.4 percent in April-October 2012). We are eating more than we are producing. This has huge negative portents for the future.

#1: As long as the trade gap and the current account deficit stay high, the rupee will be under pressure. This can only be inflationary. The November Consumer Price Index is just under 10 percent at 9.9 percent. It could still rise.

#2: As long as the GDP growth story is led by consumption demand and not investment demand, the slowdown will not reverse. In fact, as consumption outpaces increases in productive capacity, prices will be under pressure.

#3: The government is also spending more on consumption (subsidies, etc) and less on investment. One more piece of evidence in this regard is the decision to increase the LPG subsidy cap to nine cylinders per household instead of six. This will bloat the subsidy bill by at least Rs 3,000 crore at a time when the government can't afford it.

#4: At last count, the losses of oil companies were running at the rate of Rs 420 crore a day - and targeted to reach over Rs 1,70,000 crore for the whole of 2012-13. On the other hand, only Rs 30,000 crore is being released as subsidy so far. The budget arithmetic is gone for a toss once more.

#5: Falling exports despite a 20 percent drop in the exchange rate, and declining investments, despite a consistent rise in domestic consumption, suggests that India's slowdown-cum-inflation scenario is structural in nature. It will not reverse with surface tinkering.

It is too early to predict that the economy is out of the woods just yet, despite the October IIP surprise. P Chidambaram has a lot of work to do - and interest rate cuts alone will not do the trick. He needs to show big bang reforms, not just some ability to juggle the budget numbers.

India continues down the road to stagflation - and only shock therapy will work.

by R Jagannathan

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