Growing Inflation and Declining Industrial Production hampers the Indian Economy

The Ministry of Statistics and Programme Implementation (MOSPI) has released the Consumer Price Index based inflation data for the month of November, 2019 and the Index of Industrial Production (IIP) data for the month of October, 2019.

The CPI based inflation rate which stood at 2.11% in the month of December,2018 has been seeing a steady increase and is now at 5.54% in the month of November,2019. The rate of increase of inflation rate has been severe since the month of August, 2019. This rise in inflation rate is majorly dominated by the food inflation. The consumer food price index (cost of a typical food basket) based inflation stood at 10.01%. The Food & Beverages has the highest inflation rate among all other categories.

This rise in food inflation is driven by the unusual rains which affected the output of vegetables. In a typical Indian household, for vegetarians, the necessary food basket consists of cereals, vegetables and pulses. For a non vegetarian on the other hand, the necessary food consists of meat, fish and egg along with cereals and vegetables. The vegetable inflation stood at a whopping high of 36% while the inflation for pulses was as high as 14%. The meat and fish inflation stood at 9.2%. Among the necessary items in the food basket of a typical Indian family, only cereals had a lower inflation rate compared to the others. So a typical Indian household, both vegetarian and non vegetarian, has to spend more considerably to maintain the necessary food basket or has to reduce consumption.

The IIP numbers show a negative growth, three months in a trot. The decline is evident in all sectors. The manufacturing sector which accounts for three fourth of the factory output contracted by 2.1% as against a 8.2% growth a year before. Same is the story for the mining and the electricity sector. The overall IIP saw a contraction of 3.8% as against a growth of 8.4% in the same month, previous year.

The IIP numbers for October, 2019 stands to be the lowest when compared for the same month over the years. One of the reasons for this remains the demand slump. The Q2, growth numbers clearly showed a slump in the private consumption growth rate. Moreover there has been a decline in exports also leading to a further slump. The contraction in consumer durables deepened in October. Production of items such as cars and household appliances contracted 18% in October, after shrinking 9.9% in the month before. Capital goods production that reflects investments in manufacturing continued its sharp contraction and stood at -21.9%.

The declining production all across and specially in the manufacturing sector, which is one of the most people intensive sector, means that an average Indian working in these sectors is earning less given the contraction in output. The inflation study showed us that an average Indian family has to spend more significantly to maintain the necessary food basket or they have to reduce consumption. Moreover there has been increase in tariffs of another necessary good, telecom. So with a lower earning and higher spending in necessary basket would mean lower demand for all other goods. Hence the problem of demand slump intensifies. With the growing slump, there is a high probability of further reduction in industrial output with no sign of recovery. Further given the whopping high food inflation, if certain proportion reduces consumption of necessary food, this will impact productivity as suggested by many studies. This drop in productivity might lead to more reduction in industrial output.

The present situation needs serious intervention from the government. Many state governments have started giving onions at a subsidized rate. IPD sincerely hopes that governments all across takes concrete steps to help India come out of this trap. This should be in the top priority of the government. With the parliament on session, IPD hopes this issue is taken up for discussion and concrete steps are taken.