March IIP growth cannot hide industrial stagnation

Growth in industrial output in India continues to be stagnant. Sift through March 2013 data released on 10 May and the message that comes through is that stagnation is widespread and problems deep-rooted.

On the surface, a growth of 2.5 per cent in March 2013 Index of Industrial Production (IIP) as compared to the same period of the previous year appears good as it is the highest growth rate recorded since last October. However, the March 2013 growth of 2.5 per cent came over a contraction in industrial output of 2.8 per cent in the corresponding period of the previous year.  Year-on-year growth in March's industrial output is largely on account of a statistical reason.

Industry lobby groups such as Confederation of Indian Industry (CII) once again asked the central bank to reduce interest rates and the government to remove execution roadblocks after the release of IIP data. Given that monetary policy, by way of interest rate reductions and liquidity support, has been easing since January 2012, but with little effect, states and centre have to do the heavy lifting in getting industrial output to see a significant increase.

Other than clearing execution roadblocks to reverse industrial stagnation and the slowdown in overall economic growth, the central government needs to take another look at the composition of its expenditure. Central government's expenditure is heavily oriented towards consumptions spending. It may be time to use the respite provided by a weakening trend in the price of crude oil, to fast-track last union budget's plans for infrastructure spending. Government infrastructure tends to crowd-in private spending and may be the catalyst to boost sentiment.