India's Industrial production grew merely 1.2% in July: Demonetisation still hurting us

Latest data on IIP makes a clear case for Modi government’s disastrous management of the economy.

 |  5-minute read |   13-09-2017
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There couldn’t be a clearer evidence of slowdown in manufacturing than the Index of Industrial Production (IIP), and the latest data just brings in more bad news. Released on Tuesday, September 12, the IIP data shows that it has grown by only 1.2 per cent, while it grew at 4.5 per cent this time last year, establishing without a fragment of doubt that industrial activity and manufacturing are still reeling under the impact of demonetisation and GST, the twin shocks unleashed on the economy by the Narendra Modi government in the last one year.

While IIP shows that it grew only by 1.2 per cent in July this year, this is still better off than the 0.17 per cent contraction that took place in June, which meant a complete slump and loss of existing jobs. According to Business Standard, the consumer price index-based inflation has touched a five-month high, mostly due to high petrol and diesel prices in the country, despite a global low oil and gas price.

Recently, the RBI data on demonetisation showed that 99 per cent of the demonetized notes had returned to the system, pulling the rug from underneath the premises on which notebandi was sold as a “bold step” to “eradicate black money”.

manu-pivc_091317032932.jpgPhoto: Reuters

In addition, the GST rollout has caused tremendous problems within the manufacturing sector, and reports suggest that the fall in IIP in June, mostly part of the formal economy, was because of pre-GST stocking. But the continued low rate of IIP in July showed that industrial recovery – impacted by GST and demonetisation within eight months of each other – is languishing under the weight of both the decisions.

Reports have shown that food items have become more expensive, because of both GST and CPI-driven inflation. According to the Economic Times, retail inflation in August rose to a five-month high on the back of food inflation, which was up at 3.36 per cent in August.

Opposition politicians have slammed the government over the continued impact on manufacturing, prices of essential items, saying the dip in factory output coupled with inflation is leading to “stagflation” or inflation during economic stagnation.

Not only the opposition and economists critical of the establishment, even a prominent auto manufacturer like Hyundai has given out a press statement admitting the adverse impact of the GST cess, saying the demand has slumped.

Hyundai India has said “rolling back to multiple rates with pre GST classification has come as a setback to the industry shaking the confidence of auto manufacturers”. It must be remembered that Hyundai is only confessing in public the woes that manufacturers have been whispering in the industry corridors and communicating them privately to business journalists and policy-makers.

However, the government has neither acknowledged the acute distress faced even in the formal manufacturing sector, leave aside the devastated informal economy, nor has it taken steps to correct the past mistakes. In fact, the BJP national president Amit Shah has attributed the demonetisation-induced economic shock to “technical reasons”.

However, as the reports publish more and more data, something is becoming amply clear. Modi government has mismanaged the economy, taking a reasonably healthy and robust economy and turning it into a sick, jobless one that’s reeling under lack of investment as well as facing the decisional shocks of notebandi and hasty GST, which has made services such as health, transportation, communication, movie-going, entertainment, dining out, tourism, and various other sectors inflationary.

According to Mint, the slowdown in GDP to 5.7 per cent – from the 7.9 per cent last year before demonetisation was implemented – is an indication that “disruption” caused by note-bandi has directly impacted the GDP grow rate, turning India into one of the fastest slowing economy. The slump in IIP has been attributed to GST induced confusion and clamour to go for tax slabs that make the entrepreneurs forego tax returns in order to avoid excessive online tax regime.

A number of economists had predicted demonetization to impact retail sooner than later and this is exactly what has happened now.

Months after the cash-dependent informal economy was practically decimated, and tens of thousands thrown out of jobs because there was no cash to pay the daily wage labourers, the tsunami of economic mayhem has hit the secondary and tertiary economy. This, when coupled with zero impact on black money – in fact most of the black money has been turned white because of the currency deposit in banks – and hardly any recovery of fake currency notes, has been enough to demonstrate the ramshackle condition of an economy that was relatively robust and dynamic even a year back.

Industrial output is a major signal to the foreign investors and a slump in IIP can ward off even those interested in investing in India at present. A low IIP rate is bad news for Modi’s flagship “Make in India” initiative as well, as it is grim outlook for those looking to turn to India shift their production units.

Moreover, even the digital transactions have plateaued now; months after notebandi had forced many to pay online instead of using cash. But the needless “surgical strike” had made India into a financial patient that would take pretty long to fully recover its “animal spirits”.

Also read: Demonetisation was a disaster India did not deserve

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