IIP shrinks again, inflation accelerates

GS Paper III

Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims:

Mains: Reasons behind recent dip in Index of Industrial Production (IIP) index

What’s the News?

India’s industrial output shrank while inflation swelled highlighting challenges for policymakers battling an economic slowdown amid surging food prices.

Reasons behind dip:

• The slide in the headline IIP numbers has been triggered by a contraction in manufacturing and electricity, alongside a record contraction in the production of capital goods — reflective of the weak investment climate.
• A slide in the output of infrastructure goods and consumer durables offers pointers to the underlying weak demand conditions.
• The Indian economy is presently facing a structural growth slowdown originating from declining household savings rate, and low food inflation and agricultural growth.
• Low agricultural growth is feeding into low agricultural and non-agricultural wage growth in rural areas, which is impacting rural demand adversely.

Steps taken:

• The government has announced various measures to support the automobile industry, exporters, non-bank lenders and housing financiers in addition to announcing a sharp corporate tax rate cut for domestic companies not availing of any tax breaks and to new manufacturing companies.
• RBI has so far cut its benchmark repo rate five times in a row this year totalling 135 basis points, but kept the rate unchanged at its 5 December monetary policy review as retail inflation remained firm and the impact of the rate cut so far has been muted.

Required Structural reforms:

Short-term measures:

• Make GST simpler, bring liquor, fuel in GST ambit as well
• Make IBC simpler and time bound
• Relax FDI rules
• Get RERA implemented across the country to resurrect real estate
• Reform banking
• Introduce investment allowance for a few years.

Long-term measures:

• Judicial reforms to dispense the 3.5 crore cases pending in various courts across the country.
• Government, the biggest litigator with half the pending cases in courts, must exercise caution in appeals.
• Labour reforms that compress 40-odd labour codes and reduce compliance time and costs.
• Land reforms to make land available to industry on-tap.
• Ease compliance burden/ease of doing business across the country; not just in Mumbai and delhi.

Conclusion:

Policies should not aim solely at economic growth and government should address more structural reforms as well.

Additional information:

Index of Industrial Production data or IIP:

• It is an index that tracks manufacturing activity in different sectors of an economy. The IIP number measures the industrial production for the period under review, usually a month, as against the reference period. IIP is a key economic indicator of the manufacturing sector of the economy.
• There is a lag of six weeks in the publication of the IIP index data after the reference month ends. IIP index is currently calculated using 2011-2012 as the base year.

IIP Published by:

• In the case of Index of Industrial Production India, IIP data is compiled and published by CSO every month. CSO or Central Statistical Organisation operates under the Ministry of Statistics and Programme Implementation (MoSPI). The IIP index data, once released, is also available on the PIB website.
• The CSO uses secondary data to reach the monthly IIP number. The data is sourced from various agencies in different ministries or departments of the government. The Department of Industrial Policy and Promotion (DIPP) is the source for the major chunk of data for the calculation.

IIP Data use:

The factory production data (IIP) is used by various government agencies such as the Ministry of Finance, the Reserve Bank of India (RBI), private firms and analysts, among others for analytical purposes. The data is also used to compile the Gross Value Added (GVA) of the manufacturing sector in the Gross Domestic Product (GDP) on a quarterly basis.

IIP base year change:

• The base year was changed to 2011-12 from 2004-05 in the year 2017.
• The earlier base years were 1937, 1946, 1951, 1956, 1960, 1970, 1980-81, 1993-94 and 2004-05.

IIP vs ASI:

While the IIP is a monthly indicator, the Annual Survey of Industries (ASI) is the prime source of long-term industrial statistics. The ASI is used to track the health of the industrial activity in the economy over a longer period. The index is compiled out of a much larger sample of industries compared to IIP.