Face up to cold truth: Stagflation here to stay

Finance minister Nirmala Sitharaman had recently told Parliament that green shoots in the Indian economy are clearly visible and the steps taken by the Reserve Bank of India would boost the growth further. In defence of the government’s economic performance, Ms Sitharaman had cited improvement in foreign inflows, industrial growth, forex reserves, performance of the stock markets and tax collections under the Goods and Services Tax.

But little more than 24 hours later, another arm of the same government — the ministry of statistics and programme implementation — literally showed the mirror to the finance ministry through its monthly data which revealed that industrial growth has again shrunk while retail inflation has continued to shoot up to a six-year-high. These two data points show that the Indian economy is still not out of the woods and is firmly in the grip of stagflation.

Though industrial growth in December 2019 has shrunk by 30 basis points, the situation would look more disconcerting if one looks the details of the slowing industrial growth. There has been a secular contraction in all user-based segments except primary and intermediate sectors. The production of consumer durable goods, which is a barometer for consumer confidence in the economy, has contracted by 6.7 per cent. Shrinkage in the production of consumer non-durable goods — by 3.7 per cent — shows that the people have rediscovered thrift in their lives. The production of capital goods, which has a direct correlation with the economy growth and job creation, has contracted by 18 per cent in December. When the production and demand remain muted, one wonders how the finance minister could expect higher tax revenue. This reaffirms the concerns of poor job creation in the country — a profoundly worrisome prospect for a country of 130 crore people, a majority of whom are young.

Components that fuelled retail inflation to a six-year-high of 7.59 per cent in January could have a longer lasting impact than those that stoked inflation in December. When inflation hit 7.35 per cent in the previous month due to rise in vegetable prices, it was not considered a grave threat, as vegetable prices would get corrected quickly after higher production. In January, though, higher vegetable prices remained the biggest contributor; the prices of pulses, meat and fish, eggs, spices, personal care products, transport and communication have spiked by more than six per cent. The prices of some of these products may not decline very soon. A hike in the Liquefied Natural Gas prices, though its impact on consumers was softened by a higher subsidy, would also surely impact the government’s finances.

The Narendra Modi government should not take the economy for granted and let politics take it hostage. As rating agency Standard and Poor’s said in its assessment, downward pressure on India’s sovereign credit ratings could emerge if the country’s average economic growth over the next four years falls below the forecasted 7.1 per cent or if the general government deficit (including the Centre and states) rises or if political developments undermine the economic reform momentum. Let’s hope that the Prime Minister is listening.