[Following editorial has been published in The Hindu on 15th January 2016. Read through it and try to answer the questions that follow. Please do not copy and paste answers. The objective of this exercise is to get you in the groove of answer -writing. Try to write in your own words. Don't hesitate to write in a bulleted-format, if you are uncomfortable in writing in paragraph form.]
The latest Index of Industrial Production data, showing a contraction in factory output in November, should set alarm bells ringing in North Block, especially when read along with the acceleration in retail inflation. While the reasons for the slump in industrial production, including the festival holidays, were broadly known, the magnitude of overall decline as well as the drops in specific industries are cause for concern. Both basic goods and capital goods – proxies for manufacturing and investment demand – contracted 0.7 per cent and 24.4 per cent, respectively. The government’s IIP figures also come close after the Nikkei India Manufacturing Purchasing Managers’ Index, where the survey revealed a drop in output in December when companies scaled back production on a decline in new orders. The gathering consensus among economists is that, save a few bright spots like automobiles and consumer durables, demand is precariously placed. Two key drivers, the overseas export markets and the rural economy, are both facing independent challenges. Global trade growth has been becalmed by China’s slowdown and is now being roiled by the yuan’s depreciation, while back-to-back deficient monsoons have sapped rural consumption capacity. The economy’s momentum, thus, is threatened by the prospect of a sustained slowdown that may need to be countered urgently by corrective fiscal interventions. With the Consumer Price Index (CPI)-based reading rising for a fifth straight month in December to 5.6 per cent, the accelerating retail inflation could end up posing a significant risk, of combining with the faltering growth to produce stagflation.
Some economists, including the Chief Economic Adviser Dr. Arvind Subramanian, have mooted the idea of the government temporarily straying from its fiscal consolidation path in order to enable it to step up spending on infrastructure to pump prime the economy, especially given the low levels of private investment. Any additional public expenditure, when coupled with the increased payouts for salaries and pensions as part of the implementation of the Seventh Pay Commission’s recommendations and the One Rank, One Pension scheme, will in turn fuel price pressures at the retail level and could complicate the Reserve Bank of India’s inflation targeting agenda and monetary policy calculus. While oil prices remain in free fall, offering succour, food prices continue to climb pushing food inflation to 6.4 per cent in December. And the outlook on that front is hardly reassuring, with reports that unseasonal weather conditions including an El Nino-induced milder winter could lead to the rabi crop yield ending up well below expectations in several regions. With the RBI’s bi-monthly monetary policy and the annual Central budget set to bookend February, all eyes will be on the next set of monthly IIP and inflation data to see if the price gains will plateau, as the central bank had predicted in December, or continue to trend up, and whether output growth recovers or not.
1. Explain the following terms:
- Retail Inflation
- Basic goods
- Capital goods
- Purchasing Managers' Index
- Public Expenditure
- Fiscal Consolidation
- Monetary Policy
2. What is Index of Industrial Production? How is it calculated? Which agency is responsible for calculation of IIP? At what frequency is IIP calculated?
3. What indices are there to measure inflation in India? Which agency is responsible for calculating these indices? At what frequency are these indices calculated?
4. What is the use of Purchasing Managers' Index? How is it different from other inflation measuring indices?
5. What is Consumer Price Index? How is it related to the economic growth of India?
6. What is Seventh Pay Commission? At what frequency are Pay Commissions appointed? What is the composition of a Pay Commission? What is the objective of a Pay Commission?
7. What is understood by One Rank One Pension? How is it related to the economy of our country?
8. It is said that Indian economy is directly related to El-Nino. Do you agree? Justify
9. What is stagflation? How does it impact the economy? What are its causes?