dna edit: Worries on all fronts

The decline in industrial production for the second month in succession is bad news for an Indian economy already reeling under a weakening rupee, mounting external debt, and high inflation.

The Index of Industrial Production (IIP) estimates for May and June indicate that industrial output fell by 2.8 and 2.2 per cent compared to the same months last year. This decline becomes more stark considering that industrial production had fallen 2 per cent from June 2011 to June 2012.

What we are definitely witnessing is a sustained period of low growth. Worse still, this has coincided with runaway inflation. While retail inflation dipped marginally to 9.64 per cent in July from 9.87 per cent in June, it has not tapered off adequately for the RBI to conceive a major policy rate cut.

But cutting interest rates seem to be the only option. To allow money to flow into the share markets and facilitate access to more, and cheaper, credit, interest rates must fall. Otherwise, GDP growth, which slumped to a decadal low of 5 per cent in 2012-13, could dip further. The IIP data indicates the slowdown is spreading to more sectors.

Mining and manufacturing declined for the second year in succession. The power sector grew 8.8 per cent in June 2012 but has zero growth to show this June. Fast-moving consumer goods output fell 2.3 per cent, capital goods 6.6 per cent, and consumer durables (automobiles, electronic goods) 10.5 per cent.

Despite dwindling domestic demand, exports rose 11.6 per cent in July and imports declined 6.2 per cent. The Finance Ministry’s steps to tap new export markets and curtail domestic gold and oil demand must be credited for this showing. But attempts to restrict current account deficit to 3.7 per cent of the GDP have become complicated.

The weakening rupee has rendered imports burdensome and led to massive hiking of import duties. More worrisome is the huge short-term external debt, run up mostly by Indian companies, to be serviced in the next 12 months. The amount — $169 billion or 59 per cent of total forex reserves — will strain the CAD significantly.
Ultimately, the Indian economy has to strengthen its fundamentals.

Exports and foreign institutional capital inflows fluctuate and can finance the CAD to only a small extent. Revitalisation of domestic industry through removing supply-side bottlenecks and clearing projects must get priority. It is unpardonable that coal imports rose fourfold to $15 billion in the past six years despite large domestic coal reserves. A policy to expedite mining through an extremely liberalised coal block allocation process saw most allottees turn rent-seekers while the coal stayed underground. 

The policies come easy; execution is the tough part — a cabinet secretariat panel set up recently to clear stalled projects worth about Rs7 lakh crore must get cracking now.