|IIP burns while MPs fiddle|
|Tuesday, 13 December 2011 00:00|
Policy paralysis and RBI hit IIP, Oppn plays Anna game
Three days after the government conceded the economy would grow at 7.25-7.75%, a sharp contraction in the IIP suggests the number may be closer to 6.5-6.8%—for the first time after two years, the IIP contracted 5.1%, taking April-October growth to a mere 3.5% as compared to 8.7% in the April-October period last year. The last time IIP contracted was in the immediate aftermath of the global financial crisis—it fell 5.3% in January 2009 and by 7.2% in February. Given that growth in the first few months of the year was higher, a 3.5% April-October figure suggests overall IIP for the year could be in the 2.5% range.
Some part of the October fall is due to the higher base in October last year and also some extra holidays related to the festival season this year, but that doesn’t explain the major part of the collapse. The policy paralysis of the last year in particular, and the anti-industry stance on various high profile projects, ensured India Inc has virtually stopped investing in big projects—the number of new projects announced fell from R7.2 lakh crore in June 2010 to a mere R2.6 lakh crore in September 2011—as a result of which there was a 25% fall in the capital goods index in October (it fell 7% in September). But capital goods have a very small weight in the IIP and so don’t affect it directly. What indicates a broader trend is the negative growth in consumer goods as well. Up by 3.5% in September, they contracted by 0.8% in October, which was festival season—within this, consumer durables contracted 0.3% after growing 8.7% in September—and there’s no base effect at play here. Exports won’t be a driver of IIP any more, given the global situation and the $9bn writedown—exports rose 10.8% in October as compared to September’s 36%. Intermediates contracting 4.7% highlights the way things will look since this segment has many leading indicator characteristics.
Apart from RBI changing its stance and cutting rates—they rose 375 bps in 13 policies since March 2010—the political class needs to realise the gravity of the situation. While the government’s internal politics scuppered the UIDAI, opposition politics (Mamata Banerjee behaves like she’s in Opposition) killed the insurance and banking Bills and is likely to do the same with the pension Bill. And now, with opposition parties appearing to be backing them by participating in the Jantar Mantar rally, Team Anna’s call to make laws not in closed rooms (Parliament?), North Block or South Block, but in ‘streets, in the villages’ will make sure whatever little legislative activity is taking place gets stopped.