Index of Industrial Production: Weak consumption demand not a good sign for the economy

New Delhi: The Index of Industrial Production estimates that weak consumption demand does not bode well for the economy. If we look at the figures for each of the three components manufacturing, mining and power generation, a growth of 0.9%, 4% and 6.1% has been registered respectively. On the other hand, as per user-based classification, […]
 


Index of Industrial Production: Weak consumption demand not a good sign for the economy

New Delhi: The Index of Industrial Production estimates that weak consumption demand does not bode well for the economy. If we look at the figures for each of the three components manufacturing, mining and power generation, a growth of 0.9%, 4% and 6.1% has been registered respectively.

On the other hand, as per user-based classification, the four segments of factory output namely primary goods, capital goods, intermediate goods and infrastructure goods registered positive growth in March this year as compared to their growth during the same month last year. Production of primary goods grew by 5.7 percent, capital goods by 0.7 percent, intermediate goods (0.6 percent) and basic goods by 7.3 percent. The growth rate of production of infrastructure goods reflects the positive outcome of the massive increase in capital expenditure during the last year despite the severe Covid wave in the country in March-April last year.

But official data also shows weakness in consumer sentiment as both consumer durables and non-durables posted negative growth of 3.2% and 5.0% in March. The growth pattern in the usage-based classification suggests that weak consumption demand is likely to persist for the next few months due to higher inflation and rising interest rates. Because the Reserve Bank has increased the benchmark interbank lending rate by 40 basis points.

However, there is likely to be a higher demand for infrastructure goods as Prime Minister Narendra Modi’s government has allocated a record Rs 7.5 lakh crore for capital expenditure for the current fiscal. According to the Revised Estimates presented by Finance Minister Nirmala Sitharaman, the capital expenditure during the last financial year was over Rs 6 lakh crore which is a record. According to some economists, weakness in consumption demand, coupled with high inflation rates, poses major risks to weak economic growth.

Second, the adverse economic impact of the prolonged Russo-Ukraine war poses significant risks to India and the world economy. This may dash the hopes of more private investment and foreign direct investment coming into the country.