Industrial slowdown: It's time to act

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Bikky Khosla | 16 Dec, 2014
Last week's industrial production data for October is a real shocker to the economy. It shows a sharp contraction of 4.2 percent even though November retail inflation eased to a two-year low of 4.3 percent. Another set of data that somewhat belies the IIP's gloomy picture shows a four-month high bank loan growth of 11.3 percent at the end of November. In addition, wholesale inflation for the month stood at zero percent, as shown by latest official data. So, the three-year low IIP data looks clearly abnormal.

The sharp fall in factory output is primarily due to negative performance shown by manufacturing, capital goods and consumer items sectors. The IIP data shows that manufacturing output dipped 7.6 percent, capital goods 2.3 percent and consumer goods 18.6 percent in October. In other words, neither consumers nor businesses are spending much. Demand is in the slammer and manufacturing is in dire straits, something about which the industry has long been cautioning. Exports are also at a risk from slowing global demand. In this scenario, naturally, the million dollar question is: how much further will the RBI want inflation to ease and industry to contract before cutting rates? I see no ground for the central bank to deny a rate cut in its next policy review.

The dismal data also offers a reality check to the government and raises question about its success in pushing policy reforms. It is true that efforts have been made by the government to ensure a recovery in the economy, but it seems businesses are still holding on to cash and waiting eagerly to see what kind of "achche din" are in store for them. The government has to act fast to convince them about future growth prospects. It has to make significant headway toward reform by February-March and the budget session. Particularly, I think implementation of the pending projects, amendments to the Land Acquisition Act and introduction of GST should top their priority list.

Meanwhile, it is increasingly become evident that the grip of crude oil prices over the global economy is loosening and the downfall, along with some other factors, has had a spillover effect on the Indian stock markets, with the BSE losing more than 1,100 points during the last week. However, I think overall the collapsing oil prices would have some strong positive effects on our economy. Most importantly, it will help us reduce the oil import bill and tighten the noose on current account deficit and inflation. The government should try to make the best of this fiscal room created by the crude crash to push reforms and bring the economy back on track.

I invite your opinions.