Three sets of macroeconomic data released at the top of this week all reflect the downtrend in the economy. Even when viewed separately, each of these — the monthly industrial output data for September, retail inflation for October and the latest trade figures — is cause for concern, but together they reinforce the perception of gloom and speak to the absence of the right policy measures to reverse the downturn. There is a degree of correlation between these numbers. For instance, the fall in manufacturing as reflected in the index of industrial production (IIP) partly explains the deceleration in exports. Persistently high retail inflation, based on a new broad-based consumer price index, draws attention to the inadequacy of supply-side measures to check the steep increase in the price of sugar, pulses and edible oil, which are behind the general price rise. The broad story the figures tell may be the same but the signals they send to policy are mixed. The Reserve Bank of India, which faced a barrage of criticism recently for not relaxing monetary policy, can draw no firm conclusions. On the one hand, the contraction in industrial output has increased the clamour for a policy rate cut. On the other, high inflation seems to vindicate its action in holding on to the rates.
The disappointment of policymakers over the contraction in industrial output in September is understandable but it ought to have been anticipated. In August 2012, the IIP grew by 2.5 per cent over August last year, prompting many in the government to claim that the economy has turned the corner. Clearly the downward drift in industrial production is set to continue for a while. During the entire April-September period, the industrial sector expanded by just 0.1 per cent. Of particular concern has been the fall in the capital goods and consumer durables sectors. The former is a proxy for investment while the latter tracks consumer demand. The government’s efforts at talking up sentiment and reviving “animal spirits” will be keenly watched but it is clear that the Prime Minister and his colleagues, by themselves, will not be enough to reverse the downturn, which as the latest economic statistics clearly indicate, is all pervasive. The record trade deficit of $21 billion on the back of a continuous fall in exports and a surge in imports will pose further strains on the current account. Two points that merit special attention here are that exports have not benefited from the rupee’s depreciation and that the rise in imports is due to large oil and bullion purchases. Amidst the slowdown, the import of capital goods and other investment-related items is sluggish.