THE SINKING ECONOMY

Macroeconomic figures recently released by the government point to a looming dilemma for the Reserve Bank of India (RBI) in its quest to fuel growth. Though industrial growth continues to lag—and even fall—the central bank now has little room to lower key interest rates to boost growth, as high inflation has become a credible danger. This is unlike the past several months, when low inflation helped the RBI justify its 1.35 percentage point cut in repo rates (the rate at which commercial banks borrow from the central bank) from the beginning of calendar 2019 till date.

While the rising prices of onions, vegetables and pulses have taken retail food inflation into double digits (10.1 per cent in November 2019), industrial growth, as measured by the Index of Industrial Production (IIP), went negative. This indicator recorded de-growth of 3.8 per cent in October 2019, a sharp drop from the 8.4 per cent growth recorded in October last year.

While the negative industrial growth rate might once have led the RBI’s Monetary Policy Committee (MPC) to slash interest rates again, that is unlikely to happen now. On December 5, the RBI paused its rate-cutting spree, much to the disappointment of industrial players, who had been clamouring for more and deeper rate cuts than the 25 basis points that occurred every time the central bank reviewed rates, starting February this year.

Rising food prices took retail inflation to an over threeyear high of 5.5 per cent in November, breaching the midpoint of the MPC’s medium-term inflation target of 4 per cent for the second consecutive month. Onion prices rose 145 per cent in November, over the 98 per cent increase the previous month, due to crop damage from excessive rains, creating a supply shortage.

Meanwhile, breaking its trend over the past three months, Wholesale Price Index (WPI)-based inflation rose

40 basis points in November to 0.6 per cent, led by the substantial increase in the prices of vegetables, particularly onions. Onions have a share of 0.16 per cent in the WPI and 0.64 per cent in the CPI (consumer price index). ‘However, 100 per cent increase in prices can lead to a proportionate increase in the indices, which in turn has a bearing on overall inflation and finally on monetary policy outcomes,’ says Care Ratings in a note. There is also the role of hoarding to consider—speculators tend to step in and block supplies to push prices further up. This has led the government to introduce stock limits on holding onions and resort to imports, even as a ban on onion exports stays in place.

Meanwhile, the reasons for the shrinking of industrial output for the third consecutive month are not too hard to find. The festive season was lacklustre and sales were unable to arrest the slowdown in demand. Despite a slew of measures to encourage investment, businesses have remained risk-averse. At the same time, the RBI’s repeated repo rate cuts did not seem to make much of a difference to retail lending rates. Most of the measures the government announced, including a deep cut in corporate tax rates, targeted the supply side, but demand has continued to lag. This has reflected in the manufacturing output, which accounts for three-fourth of factory output, and registered a de-growth of 2.1 per cent in October. Consumer durables also slid further from the previous month. Production of cars and household appliances contracted 18 per cent in October.

Of the 23 industries in the manufacturing sector, 18 registered a contraction in output in October. Ten registered doubledigit declines in output, including computers, electronics and optical products (-31.3 per cent), motor vehicles (-27.9 per cent), fabricated metal products (-19.5 per cent), other transport equipment (-18.8 per cent) and machinery and equipment (-18.1 per cent). ■