The government has described the Union Budget as an ‘overall, swift rebound and recovery of the economy’ reflecting the ‘strong resilience of the country’, amid which the level of production in India’s industries is hitting a hurdle. Factory output, as measured by the Index of Industrial Production (IIP), fell for the fourth consecutive month in December 2021 to a 10-month low of 0.4%, compared to the same month in 2020. Whereas the Omicron version had become a concern by then. Its impact was limited to the contact-intensive service sectors, with no restrictions on manufacturing activity. From a nearly 13% year-on-year growth in August 2021, thanks to a lower COVID-19 lockdown-hit base, IIP growth has slowed with each passing month – from 4.35% in September to just 4% in October 1.3% in November. It may be recalled that by September 2020, most of the lockdown restrictions that could have plagued factories had been eased, so perhaps some labor force gaps and the blow to confidence and demand were the only hiccup for production managers. Those hiccups were believed to have largely gone away after the deadly second wave subsided in 2021. If that were indeed the case, industrial output should have seen a sharper pick-up in the last four months of 2021 compared to the monthly average of just 2.5%. Especially in view of the demand of the festive season. GST collections in January, reflecting activity in December, hit a new record, suggesting that all is well, but tax revenues also get bogged down by inflation and quarterly filing options for small taxpayers. In addition, GST revenue from import of goods has been growing consistently faster than revenue from domestic transactions that include service imports. The fluctuating trend in month-to-month IIP numbers makes it even more difficult to discern – since August, the overall index has switched between contraction and expansion every month, even from year to year. There has been a steady decline in year-on-year growth.
The Economy Survey for 2021-22 was describing a different scenario when it said a nascent private investment recovery is expected to pick up as corporate profits and capital-raising actions pick up. “The expected increase in private consumption levels will boost capacity utilisation, thereby spurring private investment activity,” said an RBI survey indicating increasing investor optimism and expanding output in the coming quarters. Economists believe that the IIP prints suggest that the Budget’s bet is weak that public capital spending will drive recovery from consumption and investment. Manufacturing actually shrank in December, with capital goods (reflecting investment activity) falling sharply from 2020 levels by 4.6% and staying below pre-pandemic levels. Consumer durables witnessed contraction for the fourth consecutive month, while non-durables also declined after a few months of sluggish growth. With producers, consumers still in a cautious mode due to high commodity prices and the threat of a steep hike in fuel prices after the March 10 election results, this is unlikely to ease any time soon. That the central bank remains in growth-adjustment mode while the world shifts gears to tackle inflation indicates its concern about the sustainability and quality of India’s recovery. The government must urgently resume its rosy assessment of the economy and re-examine its outlook so that ‘on-paper’ optimism is reflected in factory chimneys.
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