According to recent data released by the Ministry of Statistics and Programme Implementation (MoSPI), there has been a noticeable contraction in the Index of Industrial Production (IIP). The IIP for October 2019 stands at 127.7, marking a decline of 3.8% compared to October 2018’s figures. This downtick is primarily due to a sharp drop in activity across industries such as manufacturing, electricity, and infrastructure, stemming from an overall slump in the economy.
Meanwhile, retail inflation, measured by the Consumer Price Index (CPI), surged to a 40-month peak of 5.54% in November 2019. This upward trend is largely related to rising food inflation. The dual factors of contracting industrial activity and increasing inflation have resulted in economists fearing that India may be on the brink of entering a phase known as stagflation.
Understanding Stagflation
Stagflation refers to an economic scenario characterized by the simultaneous occurrence of increased prices and stagnation in economic growth. In these situations, the economy’s growth rate is slowed, unemployment levels remain consistently high, and yet, inflation or price levels continue to rise.
The Dangers of Stagflation
Stagflation presents a tough challenge for the nation’s central banks and government as it limits their ability to stimulate the economy using conventional methods. Typically, in low growth situations, the common response would be to stimulate the economy by increasing public spending and lowering interest rates, thereby creating demand.
However, these measures can also lead to increased prices and inflation. As such, when inflation is already at a high level, these tools cannot be used effectively making it difficult to escape the low growth-high inflation trap. The best way forward in such scenarios is to focus on increasing productivity which facilitates higher growth without causing inflation.
Understanding the Index of Industrial Production
The Index of Industrial Production (IIP) serves as a marker for changes in the volume of production across Indian industries. It is computed and published monthly by the Central Statistical Organisation (CSO) under MoSPI, using 2011-2012 as the base year.
The IIP tracks three main sectors: Mining, Manufacturing, and Electricity, with each having different weights. Eight core industries, electricity, crude oil, coal, cement, steel, refinery products, natural gas, and fertilisers, form about 40% of the index’s weight.
| Industry | Weight |
|---|---|
| Electricity | 10.32% |
| Crude Oil | 8.98% |
| Coal | 10.33% |
| Cement | 5.37% |
| Steel | 6.68% |
| Refinery Products | 28.04% |
| Natural Gas | 2.44% |
| Fertilisers | 2.63% |
Understanding the Consumer Price Index
Inflation refers to the increase in the prices of everyday goods and services such as food, clothing, housing, and transport. On the other hand, deflation, its rare opposite, represents a decline in these prices. Both are measured as percentage changes over time.
In India, inflation is primarily tracked by two main indices: WPI (Wholesale Price Index) and CPI (Consumer Price Index). WPI captures price changes at the wholesale level, while CPI tracks retail inflation by collecting price changes of common goods and services used by consumers.
