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Slowdown in Industrial Growth & rising Inflation

Slowdown in Industrial Growth & rising Inflation

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  • GS3 | |  Economy  | |   Banking & Financial Sector | | Inflation

Why in news?

  • Yet another indicator, Index of Industrial Production (IIP), worryingly, points to the Indian economy slowing down fast.

Industrial growth

  • Growth in the Index of Industrial Production (IIP) slowed in February 2019 from 1.44% in January 2019.
  • 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.
  • Within the index, the mining and quarrying sector saw growth slowing to 2% from 3.92% over the same period.
  • 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.
  • 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%.

Inflation

  • Retail inflation, as measured by the Consumer Price Index (CPI), quickened in March 2019 to a five-month high due to a speeding up of inflation in the food and fuel sectors.
    • Inflation in the food and beverages segment of the CPI quickened to 0.66% in March compared with a contraction of 0.07% in February.
    • Similarly, inflation in the fuel and light segment quickened to 2.42% in March from 1.24% in February.
  • While price gains still remain below the RBI’s stated inflation threshold of 4%, the trajectory is hardly bound to be reassuring.

Overall economic scenario

  • GDP grew by just 6.6% in the quarter ended December 2019, the slowest pace in six quarters.
  • 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.
  • 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.

Way ahead

  • Policy challenges need to be addressed –
    • Fiscal side: 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.
      • In the fiscal year ended March, new investment proposals fell to a 14-year low, says the Centre for Monitoring Indian Economy.
    • Monetary side: 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.
    • While monetary easing could be an easy solution to the growth problem, policymakers may also need to look into structural issues behind the slowdown.
    • Easing interest rates without reforms may only help hide investment mistakes instead of fostering a genuine economic recovery.

Additional info

Monetary Policy Committee (MPC)

  • The Monetary Policy Committee of India is responsible for fixing the benchmark interest rate in India.
  • The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its decisions after each such meeting.
  • The committee comprises six members
    • three officials of the Reserve Bank of India and
    • three external members nominated by the Government of India.
  • The Governor of Reserve Bank of India is the chairperson ex officio of the committee.
  • Decisions are taken by majority with the Governor having the casting vote in case of a tie.
  • The current mandate of the committee is to maintain 4% annual inflation until March 31, 2021 with an upper tolerance of 6% and a lower tolerance of 2%.
  • The committee was created in 2016 to bring transparency and accountability in fixing India’s Monetary Policy.
  • The committee is answerable to the Government of India if the inflation exceeds the range prescribed for three consecutive months.