Modinomics, meet the industrial slowdown!

narendra modi
The Prime Minister, Shri Narendra Modi addressing the Nation on the occasion of 71st Independence Day from the ramparts of Red Fort, in Delhi on August 15, 2017.

The index of industrial production (IIP) figures declared earlier this week, portray a worrying picture of the overall Indian economy. The IIP is a measure of industrial activity in the country.

For the month of July 2017, the IIP grew by 1.2 per cent in comparison to July 2016. In June 2017, it had contracted by 0.2 per cent. While, there has been some improvement month on month, the overall trend of the IIP growth has been down for a while. Take a look at Figure 1, which basically plots the IIP growth (or contraction for that matter) over the last four years.

Figure 1:


As is clear from Figure 1, for more than a year now, the overall trend of IIP growth in the country has been downward. This is a clear indication of a slowdown in the growth of industrial activity.

One of the ways through which IIP is measured is referred as economic activity based classification. As per this method, manufacturing accounts for 77.6 per cent of the IIP. And if things for overall IIP have been bad, they have been worse for manufacturing. Take a look at Figure 2, which basically plots the growth (and contraction) in manufacturing over the last four years.

Figure 2:

modinomics
Source:  Ministry of Statistics and Programme Implementation.

What does Figure 2 tell us? The manufacturing scene in the country doesn’t look great. In July 2017, manufacturing grew by just 0.1 per cent, after having contracted by 0.5 per cent in June 2017. This is a trend that was also visible in the gross domestic product (GDP) data released in late August 2017. Let’s take a look at Figure 3, which plots the growth rates of industry and manufacturing using GDP data, over the last four years.

Figure 3:

Figure 3 clearly tells us that the growth in industry and manufacturing as per the GDP data is at a four-year low. For the period April to June 2017, industry and manufacturing grew at 1.6 per cent and 1.2 per respectively, in comparison to the same period last year.

What does this mean for the overall economy? Industry has formed around 29-31 per cent of the GDP over the years. The fact nearly one-third of the economy is barely growing should be a big reason for worry. This will impact economic growth in both direct and indirect ways. If one-third of the economy barely grows, overall economic growth is bound to slowdown. That is the direct impact.

What about the indirect impact? In order to understand this, we need to figure out how many people actually work for industry. In 2009-2010, the industry as a whole employed around 9.9 crore individuals. Analysts, Nikhil Gupta and Madhurima Chowdhury, who work for stock brokerage Motillal Oswal, in a recent research note using data from the 2014-2015 Annual Survey of Industries, state: “Over the past 35 years, employment in Indian industrial sector has grown at an average of ~2%.” The actual figure is 1.9 per cent per year.

Hence, employment in the industrial sector tends to rise at the rate of 1.9 per year on an average. Using this, we can conclude that by March 2017, the total number of people working in industry would stand at around 11.3 crore. Further, the average Indian family has 5 people. Given this, around 55 crore individuals in a population of 130 crore or around 42 per cent of the population depend on income from industry, in one way or another. An if the industry is barely growing, these people will go slow on their consumption and other expenditure, and in the process slowdown overall economic growth. This is the indirect impact.

Why is this happening? The economic slowdown initiated by demonetisation is basically continuing. It is worth remembering that first and foremost is a medium of exchange. It is a token to carry out economic transactions. When you take 86.4 per cent of the currency in circulation out of an economy, where 80 to 98 per cent of the consumer transactions (in volume, and depending on which data source you take) is carried out in cash, economic transactions are bound to slowdown. And ultimately this is reflecting in the manufacturing data.

If there is slowdown in consumption, there is a bound to be a slowdown in manufacturing. If people are not buying stuff at the same pace as they were in the past, there is no point in companies increasing production like they were in the past.

The irony is that this crisis the Modi government brought upon us. Indeed, this is very worrying in a country where one million individuals are entering the workforce every month. That makes it 1.2 crore, a year. If the growth in industrial sector slows down to the level that it currently has, how will any jobs be created for these youth.

And that is a question worth asking.

The column originally appeared in Newslaundry on September 14, 2017.

 

New IIP Shows Demonetisation Slowed Down Indian Manufacturing Growth Big Time

India_textile_fashion_industry_workers

India has a new Index of Industrial Production (IIP). It is bigger and according to economists who track such things, it is better than the previous one. The IIP basically gives growth estimates of three sectors-manufacturing, mining and electricity. The manufacturing sector forms more than three-fourths of the IIP.

The base year for the new IIP has been changed to 2011-2012 from the earlier 2004-2005. This has been done to capture the changes in the industrial sector that have happened over a period of time and “to also align it with the base year of other macroeconomic indicators like the Gross Domestic Product (GDP), Wholesale Price Index (WPI)”.

Like any other index, the IIP tracks various items that make for the manufacturing, mining and electricity sectors. These items need to be changed or relooked at from time to time in order to ensure that the IIP continues to maintain a representativeness of the manufacturing, mining and electricity sectors in particular and the industry as a whole in general.

The new IIP has a total of 809 items in the manufacturing sector. The earlier one had 620. While, the number of items which constitute the manufacturing part of IIP have gone up, 124 items have been removed as well. These include items like gutka, calculators and colour TV picture tubes. Items like cement clinkers, medical and surgical accessories, refined palm oil etc., have been added. Along similar lines, the electricity sector now includes data from the renewable energy sector as well.

Over and above this, there has been an increase in number of factories in panel for reporting data and closed ones have been removed. All in all, these steps have been taken in order to ensure that the new IIP is a better representation of industry than the old one was.

Given that, items that constitute IIP have change majorly, it is not surprising that the growth figures of IIP have changed as well. Take a look at Figure 1. It plots both the new IIP and the old IIP growth rates over the last half decade, April 2012 onwards.

Figure 1: 

One look at Figure 1 is enough to tell us that the old IIP and new IIP are different beasts altogether, though both are very volatile. Now take at data from March 2013. As per the old IIP series, the growth was at 3.5 per cent. The new IIP series puts the growth at 15.1 per cent. That’s how different the old and the new IIP are.

In fact, as per the new IIP, the industrial growth stood at 3.3 per cent in 2014-2015, the last year of the Congress led UPA government. As per the old IIP the growth had stood at – 0.1 per cent. Hence, we can conclude that the state of the industry in the last year of the Congress government wasn’t as bad as it seemed at that point of time. It’s just that the old IIP may have no longer remained a good representation of the Indian industry.

In fact, the new IIP shows that industrial growth picked up in 2016-2017, the last financial year. The growth stood at 5.1 per cent. As per the old IIP the industrial growth was at 0.6 per cent, during the course of the year. What this also tells us is that the two IIPs are as different as chalk and cheese.

There is an interesting trend that the new IIP catches on to in the manufacturing sector. Manufacturing makes up for 77.6 per cent of the new IIP as against the 75.5 per cent in the old one. Take a look at Table 1.

Table 1: Manufacturing Growth

PeriodManufacturing Growth(in %)
Dec 2012 to Mar 20139.4
Dec 2013 to Mar 20143.7
Dec 2014 to Mar 20153.2
Dec 2015 to Mar 20164.9
Dec 2016 to Mar 20171.6

Source: Centre for Monitoring Indian Economy.

The manufacturing growth between December 2016 and March 2017 stood at 1.6 per cent. This has been the slowest in comparison to the same period in previous years. Why is this the case? The one word answer to this is demonetisation. The Modi government announced demonetisation of Rs 500 and Rs 1,000 notes on November 8, 2016, and sent the economy into a tailspin. The interesting thing is that the average manufacturing growth between April 2016 and October 2016 had stood at 6.9 per cent. This signalled the revival of the manufacturing sector after having grown by around 3 per cent in 2015-2016 and 3.8 per cent in 2013-2014.

Demonetisation managed to scuttle that revival in this growth. Also, it is worth pointing out here that the IIP data is collected from “entities in the organised sector units registered under the Factories Act, 1948”. This means that the unorganised sector is not covered. And as I have often written in the past, the impact of demonetisation on the unorganised sector has been far greater.

Up until now, the government has refused to admit that demonetisation has had a negative impact on the economy (Subscription Required). I guess it’s time it looked at the new IIP numbers to realise the obvious.

(The column was originally published in Equitymaster on May 16, 2017)

Why zero inflation is bad for the economy

zero

Vivek Kaul

The wholesale price index (WPI) for the month of November 2014 was flat. Hence, wholesale prices in November 2014 were at the same level as November 2013.
For an economy that has been batting a very high rate of inflation, an inflation of zero percent, should come as a welcome relief. Only if things were as simple as that.
The devil, as they say, lies in the detail. The question to ask here is why is inflation at zero percent?
The price of food products which make up for around 14.34% of the index rose by just 0.63% in comparison to the last year. Onion prices are down 56.3% from last year. Vegetable prices are down 28.6%. Nevertheless, potato prices have gone up by 34.1%.
But this seems like a temporary trend and may soon reverse. The kharif (summer-autumn) season has seen a decline in production of most crops, due to a poor south-west monsoon this year. Over and above this, recent data from the ministry of agriculture points out that the total area coverage under rabi (winter) crops has fallen. It stood at 470.74 lakh hectares while last year’s sowing area was at 503.66 lakh hectares.
Several important
rabi crops have seen a fall in total sowing area. As the ministry of agriculture press release points out: “Wheat`s sowing area is at 241.91 lakh hectares as compared to last year’s 251.32 lakh hectares…The area under sowing of Gram is at 71.51 lakh hectares this year while the last year’s figure was 85.75 lakh hectares. Area coverage under Total Pulses is at 111.13 lakh hectares while the last year’s sowing area coverage was 124.78 lakh hectares.”
And this is a worrying sign, which could push food prices up in the months to come.
Another major reason for zero inflation in November is a fall in oil prices. Petrol and diesel prices have fallen by around 10% and 3% respectively in comparison to November 2013. In fact, the government increased the excise duty on diesel and petrol twice since October, else inflation as measured by the wholesale price index would have been negative for the month of November 2014.
Falling food and fuel prices are good news because they leave more money in the hands of people. Nevertheless, its in the third and the biggest component of the wholesale price index where the bad news lies.
Manufactured products make for around 65% of the wholesale price index. The inflation in this case was minus 0.3% in November 2014, in comparison to October 2014. Since the beginning of this financial year, the manufactured products inflation has been at 0.8%. And in comparison to November 2013, the number is a little over 2%.
What this tells us is that manufactured products inflation has more or less collapsed. A major reason for the same lies in the fact that people are going slow on buying goods. This becomes clear from index of industrial production(IIP) for the month of October 2014, when looked from the use based point of view. IIP is a measure of industrial activity in the country.
The consumer goods number is down 18.6% from October 2013. It is down 6.3% since the beginning of this financial year. The consumer durables number is down 35.2% from last year and 16% from the beginning of this financial year. And finally, the consumer non-durables number is down by 4.3% from last year and up only 1% from the beginning of this financial year.
What this clearly tells us is that despite falling inflation, people still haven’t come out with their shopping bags.  When consumers are going slow on purchasing goods, it makes no sense for businesses to manufacture them. Also, that explains why manufactured goods inflation has almost been flat through this financial year.
This is a worrying sign. If consumer spending is slower than usual, businesses suffer and this translates into slower economic growth. Further, businesses have no incentive to expand also in this scenario. The capital goods number in the IIP is down 2.3% from last year.
So why are consumers not spending? A possible explanation lies in the fact that inflationary expectations (or the expectations that consumers have of what future inflation is likely to be) continue to be high. The wounds of high inflation are still to go away. People need inflation to stay low for a while, before they will really start believing that low inflation is here to stay. As and when that happens, they will come out with their shopping bags all over again.
As per the previous Reserve Bank of India’s Inflation Expectations Survey of Households, the inflationary expectations over the next three months and one year are at 14.6 percent and 16 percent. In March 2014, the numbers were at 12.9 percent and 15.3 percent.
Interestingly, today the RBI put
out a press release stating that the October to December 2014 quarterly round of the inflationary expectations survey was being launched. Once the data for this survey comes in, we will come to know where the latest inflationary expectations stand.
If inflationary expectations fall, then it is likely that the consumer demand will improve and the broader economy will pick up as well. If inflationary expectations fall to very low levels, then consumers might also start postponing purchases, in the hope of getting a better deal. Whether that happens, we don’t know as yet. Until then, we will have to wait and watch.

The article originally appeared on www.FirstBiz.com on Dec 15, 2014

(Vivek Kaul is the writer of the Easy Money trilogy. He tweets @kaul_vivek)

Yes, inflation is lower, but Arun Jaitley should not be happy about it just yet

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010Vivek Kaul

The wholesale price index (WPI) inflation for September 2014 came in at a five year low of 2.38%. In a statement released yesterday, after the WPI inflation number was published, the finance minister Arun Jaitley said “It is heartening to note that we have been able to bring food inflation under control. Growth in vegetable and protein prices that have been contributing to the recent increase in inflation rates have shrunk thanks to the steps taken by the government. We are committed to continuing reforms in food markets that will improve supply responses and keep inflation low and stable.”
Food inflation, which forms around 14.34% of the wholesale sale price index, stood at 3.52% during September 2014. In comparison it had stood at 18.68% during September 2013. The price of the politically sensitive onion crashed by 58% in September 2014, in comparison to a year earlier. Vegetable prices have fallen by 14.98%. But potato prices rose by 90.23% during the same period. Fruit prices were up by 20.95% and milk by 11.55%. Nevertheless, the overall rise in food prices has slowed considerably in comparison to the last few years.
The government deserves some credit for this, but there are clearly other factors at work as well. The global food prices have also fallen in the recent past.
The Food and Agricultural Organization of the United Nations said in a recent statement that the “the decline” in food prices “in September marks the longest period of continuous falls in the value of the index since the late 1990s.” Food prices in September 2014 fell by 2.5% in comparison to August 2014 and 6% in comparison to September 2013. Hence, global food prices have also had an impact.
While Jaitley is quick in taking trading for controlling inflation, he offers no explanation for the low manufacturing products inflation. Manufacturing products make up 64.97% of the wholesale price index. Inflation in this group was at a low 2.84% during September 2014. This was not significantly different from the 2.36% inflation that prevailed during the same period last year.
A low manufacturing products inflation is a reflection of the low consumer demand that has been prevailing in India for a while now. For more than five years, food inflation in India was at very high. High inflation ate into the incomes of people and led to a scenario where their expenditure went up faster than their income. This led to a cut down on expenditure which is not immediately necessary.
As I have often pointed out in the past, half of the expenditure of an average household in India is on food. In case of the poor it is 60% (NSSO 2011)
When people cut down on expenditure, the demand for manufactured products falls as well. This lack of demand is also visible in the index of industrial production(IIP) number, which rose by a minuscule 0.4% in August 2014 in comparison to August 2013. The IIP is a measure of industrial activity in the country.
Nevertheless high inflation can no longer be an explanation for lack of consumer demand. Inflation has constantly been falling over the last few months. So why isn’t the Indian consumer in the mood to get his shopping bags out again? One possible explanation is that despite falling inflation, inflationary expectations still remain high (or the expectations that consumers have of what future inflation is likely to be). Or as economists like to put it the inflationary expectations have become firmly anchored.
A good data point to look at is the
Reserve Bank of India’s Inflation Expectations Survey of Households: September – 2014 which was a survey of 4,933 urban households across 16 cities, and which captures the inflation expectations for the next three-month and the next one-year period. The median inflation expectations over the next three months and one year are at 14.6% and 16%. In March 2014, the numbers were at 12.9% and 15.3%. Hence, inflationary expectations have risen since the beginning of this financial year.
The RBI points out that these inflationary expectations “are based on their individual consumption baskets and hence these rates should not be considered as benchmark of official measure of inflation.” Nevertheless, “the households’ inflation expectations provide useful directional information on near-term inflationary pressures.”
What these numbers clearly tell us is that the Indian consumer is still not convinced about the fact that low inflation is here to stay. As the RBI Survey points out “The survey shows that housewives and retired persons have marginally higher level of inflation expectations based on median inflation rates…About 72.8 per cent (72.0 per cent in the last round) and 78.7 per cent (74.0 per cent in the last round) of respondents expect double digit inflation rates for three-month ahead and one-year ahead period, respectively.”
These expectations have ensured that the low consumer demand scenario has continued despite a fall in inflation. This also explains why many analysts are downgrading the economic growth expectations for this financial year.
JP Morgan recently predicted an economic growth of only 5.1%, instead of the earlier 5.3%.
The only way the Indian consumer will get his shopping bags out again is if inflation continues to stay low for a while. Whether that happens remains to be seen. Some economists are still not convinced that the spiral of food inflation has been broken. They feel only after November 2014, the real picture on the food inflation front will start to emerge, once the impact of the below normal monsoons on summer crops becomes more visible.

The article originally appeared on www.FirstBiz.com on Oct 16, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Lessons for govt from a Mumbai taxi driver: Why inflation is killing growth

KONICA MINOLTA DIGITAL CAMERA

Vivek Kaul

Sometimes it takes a small nudge to start doing what might later seem obvious. A few months back I happened to read Nicholas Epley’s Mindwise—How we understand what others Think, Believe, Feel and Want. Epley is a professor of behavioural science at the University of Chicago’s Booth School of Business.
In this book Epley writes that “isolating activities like commuting are some of the least pleasant of any day.” “Not only is isolation unpleasant, it is bad for your health as well.” Hence, he goes on to suggest that it always makes sense to communicate with your fellow commuters or in case of taxicabs, the drivers.
“In fact, the positive effect of talking to one’s taxi driver is particularly large. Perhaps because taxi drivers come from interesting and varied backgrounds, they seem to make especially pleasant conversational partners, at least for the length of your ride…The stories I get are fascinating, the conversations are almost always interesting, and my experience is consistently better than if I had simply stared out of the window instead…Your ability to engage with minds of others is one of your brain’s greatest abilities. You’ll be happier if you actually use it,” writes Epley.
After reading this book I have “nudged” myself in the direction of trying to have a conversation with the taxi-driver, every time I use a taxicab. Late last night I was coming back home after having dinner and starting talking to the driver. Over the last few weeks the conversation usually starts around the recent increase of the minimum cab fare in Mumbai from Rs 19 to Rs 21. And then it goes off in different directions.
Yesterday night was not different from the usual except for the way the driver reacted. He was of the opinion that the decision to increase the minimum fare from Rs 19 to Rs 21 was a stupid one and that the taxi union hadn’t been doing its job properly. The response intrigued me, given that this was the first time I came across someone who did not seem to be happy at the prospect of a higher income in these inflationary times.
I asked him to explain in detail what he meant. “Main to kehta hoon minimum pandrah rupaiye kar dena chahiye, (I think the minimum taxi fare should be reduced to Rs 15),” he immediately responded. This intrigued me further. “Log taxi le nahi rahe hain. Kaafi samay khaali baithe rehna padta hai (People are not taking taxis and for long periods of time I am just sitting idle),” he continued.
And then he went on to explain that at a lower fare he would get more customers, wouldn’t have to sit idle for long periods of time during the day and would in the process end up making more money, even though the amount of money he would make per kilometre would be lower. Sometimes wisdom strikes you at the most unlikely of places. Last night I had that kind of a experience.
High inflation has been the bane of this country over the last five years. And that has hit all kinds of people including the taxi-driver I was talking to last night. When fares are raised, it means a higher price for hiring a cab for the end consumer. And he or she is not always ready to pay for that. Hence, an increase in taxi fare, which is basically inflation for the end consumer, leads to loss of business for the taxi-driver.
The way it works for the taxi-driver at the individual level, also works for the society as whole at a much broader level. As prices rise, people cut down on the consumption of non-essentials. Due to high inflation people have had to spend more money on meeting daily expenditure. Food inflation in particular has been greater than 10% over the last few years, and has only recently started to come down a little.
Given this, people have been postponing all other expenditure and that has had an impact on economic growth. Anyone, with a basic understanding of economics knows that one man’s spending is another man’s income, at the end of the day. When consumers are going slow on purchasing goods, it makes no sense for businesses to manufacture them.

This is reflected in the index of industrial production, which is a measure of the industrial activity within the country. Numbers released yesterday by the Central Statistics Office showed that for the month of July 2014, the index of industrial production grew by a minuscule 0.5% in comparison to July 2013. This was largely on account of a slowdown in manufacturing, which forms nearly three-fourths of the index of industrial production. It contracted by -1%. Many sectors within manufacturing like tobacco, apparels, paper and paper products, communication, publishing, furniture etc, contracted majorly.
This is worrying given that the expansion of the manufacturing sector remains India’s best bet to create jobs at a fast pace, for its semi-skilled workforce. And manufacturing cannot be turned around unless inflation is brought under control, so that consumer demand revives, and in turn encourages businesses to increase production of goods. Interestingly, August 2014 saw a major revival in car sales with sales going up by more than 15%.
Along with the index of industrial production, the Central Statistics Office also released the consumer price inflation number, yesterday. Inflation in August 2014 stood at 7.8%. This was a tad lower in comparison to the inflation in July 2014, which was at 7.96%. The inflation in July 2013 had stood at 9.52%.
While this is clearly good news, the worrying bit is that food inflation continues to remain high at 9.42%. In July 2014 the number had stood at 9.36%. In August last year, the number had stood at 11.11%. “In the case of food articles, price pressures were seen building up in pulses, condiments & spices and milk & milk products. Inflation in each of these categories has been rising for the last 3 months,” Crisil Research pointed out in a research note yesterday.
As I have often pointed out in the past, half of the expenditure of an average household in India is on food. In case of the poor it is 60%. If consumer demand is to be revived then food inflation needs to be brought under control.
Analysts believe that consumer price inflation will continue to fall in the months to come. A major reason for this is the fall in global oil prices. “A significant decline in petrol prices (Rs 5.4 per litre since July in Mumbai) due to lower crude oil prices globally, is also likely to have contributed to the downward price pressures in transport & communication. We expect this to continue going forward as no further hike in diesel prices is expected as long as crude oil prices stay at current levels,” Crisil Research points out.
On the flip side, a weak monsoon has led to the build up of “inflationary expectations” (or the expectations that consumers have of what future inflation is likely to be). And this could play a spoiler in reviving consumer demand.
In the long run, other than bringing down inflation the government needs to carry out structural reforms in order to revive Indian manufacturing. As Crisil Research points out “Incremental policy measures and bureaucratic improvements that the new government has taken in its first 100 days to improve the ease of doing business, has had a positive impact on business sentiments. However, it will take some time for these to translate into growth. While these are critical to lift growth in the short-term, the government needs to move forward with structural policy reforms such as implementation of GST (Goods and services tax), easing labour laws, rationalisation of fiscal subsidies, and amendment of land acquisition norms, to maintain the growth momentum beyond this year.” And that is easier said than done.
The article originally appeared on www.FirstBiz.com on Sep 13, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)