Why in the News?
India’s average Index of Industrial Production (IIP) for fiscal year 2025 has dropped to 4%, the lowest level in the past four years, showing a clear slowdown in industrial growth.
What are the main factors contributing to the slowdown in India’s Index of Industrial Production (IIP) in FY25?
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Why has rural consumption remained strained despite a drop in retail inflation?
- Lingering Effects of High Food Inflation: Although retail inflation dropped, the high food inflation experienced in the last fiscal year (October to December) continues to affect rural households, leaving them with reduced disposable income. Eg: In FY24, the spike in food prices, particularly for essential items like pulses and vegetables, strained rural budgets, and recovery from this shock has been slow.
- Reduced Farm Incomes: Despite lower retail inflation, farm incomes have been negatively impacted by factors like erratic weather, reduced crop yields, and rising input costs, which affects rural consumption. Eg: Poor monsoon and drought in some regions led to crop failures, reducing farmers’ incomes and limiting their purchasing power.
- Limited Impact of Inflation Reduction: While overall retail inflation decreased, the price drops were not significant enough in rural areas to translate into meaningful gains in consumption, especially for low-income families. Eg: The fall in vegetable prices towards the end of FY25 helped urban consumers, but rural households still struggled due to stagnant or low farm output and income.
- Structural Economic Challenges: Rural India still faces structural challenges like inadequate infrastructure, low wages, and high dependence on agriculture, which limits overall consumption despite lower inflation. Eg: Many rural households rely on agriculture, which remains vulnerable to climate change and market volatility, restricting their ability to consume more even when prices drop.
How has the performance of different industrial sectors (like mining, manufacturing, and electricity) changed in FY25 compared to FY24?
| Sector | FY24 Growth (%) | FY25 Growth (%) | Conclusion with example |
| Mining | 7.5% | 2.9% | Mining sector saw a significant decline. This slowdown could be due to reduced demand for raw materials and lower production in key mining areas. Eg: A dip in coal mining output due to lower power demand during certain months. |
| Manufacturing | 5.5% | 4% | Manufacturing growth slowed down slightly, likely due to lower consumer demand and sluggish export growth. Eg: Lower production in sectors like automobiles and textiles, impacted by weaker global demand. |
| Electricity | 7% | 5.1% | Electricity sector growth showed a slight decline, though power production still surged during peak summer months. Eg: Increased power generation in March (6.3%) due to seasonal demand, but overall growth reduced for the year. |
What steps can the government take to boost private investment and protect MSME jobs?
- Enhance Domestic Demand through Targeted Public Spending: The government can invest in rural infrastructure, housing, and public services to stimulate consumption, which in turn will encourage private sector production and investment. Eg: Increased spending under schemes like PM Awas Yojana or rural roads (PMGSY) can boost demand for cement, steel, and consumer goods produced by MSMEs.
- Strengthen Trade and Market Access for MSMEs: By finalizing beneficial trade agreements and easing export procedures, the government can open more markets for MSMEs. Eg: Concluding a bilateral trade deal with the US could reduce tariffs and give India’s 60 million MSMEs better access to one of the world’s largest markets.
- Expand Credit Support and Reduce Compliance Burden: Provide low-interest loans and simplify regulatory procedures to ease doing business for small enterprises. Eg: Extending the Emergency Credit Line Guarantee Scheme (ECLGS) and digitizing compliance through platforms like Udyam Assist can help micro-industries scale up with less red tape.
Way forward:
- Stimulate Demand and Investment: Boost domestic consumption through targeted rural and infrastructure spending while incentivizing private capital expenditure with tax benefits and interest subvention.
- Empower MSMEs for Global Competitiveness: Strengthen MSME access to credit, simplify compliance, and finalize trade deals to expand their global market footprint and protect employment.
Mains PYQ:
[UPSC 2024] What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation.
Linkage: High food prices, mentioned in the article, are putting pressure on rural spending and slowing down the economy.
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