IIP Show a Decline while Retail Inflation Continues to Rise

The Ministry of Statistics and Programme Implementation released the Index of Industrial Production numbers for December, 2019 and the retail inflation numbers for the month of January, 2020 yesterday.

After a positive IIP in the previous month, there is again a decline in the IIP in the month of December, 2019. IIP growth stood at -0.3% in Dec, 2019 as compared to 1.8% in Nov,2019. The same number in Dec, 2018 was at 2.5%. Manufacturing and Electricity show a decline in the month of Dec, 19 while Mining shows a increase. The negative growth of IIP is reflective of lack of demand in the economy. We saw a positive growth in IIP in November riding on the the surge in demand in the festive season. But this surge did not sustain and we again see a decline.

A comparison between the first nine months of FY,18-19 and FY-19-20 suggests that across all sectors there has been a decline in the IIP in Apr-Dec, 2019 as compared to Apr-Dec, 2018. It needs to be noted that the decline in Manufacturing is very alarming as this is one of the most people intensive sector after agriculture. The slow or negative growth of the people intensive sector’s IIP has a huge adverse impact on the job creation and leads to higher unemployment. Moreover it should be noted that in Dec, 2018 out of the 22 industries which contribute to manufacturing IIP, only 6 show positive growth while the rest 16 show a negative growth.

The retail inflation continues to see a surge with the CPI being as high as 7.59% in Jan, 2020. Rising inflation in a phase where there is a decline in IIP is very alarming as this makes the situation challenging for the policy makers. Rising price reflects that demand will fall further and this will have further impact on IIP leading to further decline.

The inflation rate is highest for the food and beverages category which means that the impact of this rising inflation is all across the population across income strata. Food price index is as high as 13.63%. This massive increase in inflation of the most essential category reflects a huge dent in people’s pocket. This further can reduce the savings rate given people have to spend more on essential commodities and can have a adverse impact on future investment as well.

A typical food basket for a vegetarian Indian household will have cereals, vegetables and pulses, while the same for a non vegetarian household will have meat, fish and egg in addition to the cereals , vegetables and pulses. The most severe increase in inflation rate is reflected in all the essential items which are typically in the food basket of an average Indian. The vegetable inflation is as high as 50%. This is suggestive of production bottle neck in agriculture as that is a primary reason for this rising food inflation. This reflects a very poor state of affairs for the most people intensive sector of the country.

There has been a lot being said on the declining demand specifically in the rural sector. The situation becomes further alarming with the rise in inflation rate being more severe in rural sector. While the urban sector has witnessed a slight decline as compared to previous month, the rural sector has seen a further increase. Moreover for the rural sector the rise when compared to same month previous year is much sharp than the urban sector. This will have further impact on the declining rural demand. Moreover with the bottle neck in the agricultural sector, majority of the rural population which demands primarily on agriculture has been witnessing a huge slowdown in regular income. Over and above this there has been a rising inflation.

The two main components of this is the fact that the farmers are not getting the correct price and the huge dependence of rainfall. This season there has been nonseasonal rainfall which has hampered the vegetable production. Further with the farmers not getting the right price, the ability of the farmers to withstand such loses in production is very grim. IPD sincerely hopes that steps are being taken to solve the bottle neck in agricultural sector.