From UPSC perspective, the following things are important :
Prelims level : Inflation, Index
Mains level : Industrial slowdown and it's effects
The downturn in industrial activity and the spike in retail inflation pose a policy challenge.
- Yet another indicator, worryingly, points to the Indian economy slowing down fast.
- Industrial growth was just 0.1% in February from the year-earlier period, the slowest pace in 20 months.
- Industrial output had expanded by 6.9% in February 2018.
- Industrial growth, as measured by the index of industrial production, has been slowing down considerably in recent months, dropping to just 0.2% year-on-year in November.
- Manufacturing – Manufacturing, which has a weight of almost 78% in the index, continues to be the biggest drag, with output contracting by 0.3% as compared with an 8.4% jump in the year-earlier period.
- Capital Goods – The largest contributor to the slowdown in February was the capital goods sector, which shrank by close to 9%, with the contraction widening from the preceding month’s 3.4%.
- That the revision in this closely watched proxy for business spending plans has widened, from the 3.2% contraction reported last month, is striking.
- GDP grew by just 6.6% in the quarter ended December, the slowest pace in six quarters.
- Forecast – Various institutions such as the Reserve Bank of India and the International Monetary Fund have been lowering their expectations for India’s growth in the coming quarters.
- Other Growth Indicators – With other economic indicators such as the purchasing managers’ index and high-frequency data like automobile sales also signalling weakening momentum, the overall scenario, when viewed along with the slowdown in industrial output, suggests that a turnaround in economic growth is not in sight.
- Inflation – Retail inflation as measured by the consumer price index reached a five-month high of 2.86% in March due to the rise in food and fuel prices.
- While price gains still remain below the RBI’s stated inflation threshold of 4%, the trajectory is hardly bound to be reassuring.
- The RBI, which has cut interest rates at two successive policy meetings to help bolster economic growth, is likely to be tempted to opt for more rate reductions.
Implications of such a scenario
- Need for structural reforms – While monetary easing could be an easy solution to the growth problem, policymakers may also need to look into structural issues behind the slowdown.
- Credit Market Slowdown – The high levels of troubled debt in not just the banking sector but the wider non-banking financial companies are hurting credit markets, and unless these issues can be resolved, no amount of rate cuts would serve as an effective stimulus.
- To a large extent, the slowdown is due to investments in sectors that turned sour as the credit cycle tightened.
- A decline in new proposals – In the fiscal year ended March, new investment proposals fell to a 14-year low, says the Centre for Monitoring Indian Economy.
Easing interest rates without reforms may only help hide investment mistakes instead of fostering a genuine economic recovery.