Latest Data Shows India has ‘Recovered’ — to Chronic Slowdown

My friend Vikas has been inexplicably losing weight for the past few years. He has been to several doctors and has got as many diagnoses. Last year, probably because of being underweight and low on immunity, Vikas got COVID. It made him lose even more weight. And as it happens with malnourished people, Vikas lost his will to eat. However, his dietitian gave him steroids to boost his appetite. Slowly, Vikas began to regain some of the kilos he had lost, and by December, it looked like he had almost recovered.

Then, suddenly in January, Vikas lost another kilo. His doctor was perplexed. There seemed to be nothing wrong with him. Or, as Vikas reminded them, nothing that they had been able to successfully diagnose. Vikas had indeed recovered, but to his normal ‘underweight’ state, where he was steadily losing weight every year.

Okay, I made up that story. I don’t have any friend called Vikas. This is just a parable for India’s economy, which has been trapped in a slow-growth phase for several years, even before COVID infected us.

So, all talk of economic recovery is similar to Vikas returning to being chronically underweight.

A Serious Economic Problem

The latest data for industrial production in January 2021 confirms this serious economic problem. Factory production is down 2 percent and mining is down 3.7 percent. This could have been understandable had January 2020 been an exceptional month. But no, it wasn’t. Last January, factory output had grown just 1.8 percent, and mining was up just 4.4 percent. If we go back one year to January 2019, the situation was equally dismal. Factory production had increased by just 1.3 percent at that time and mining by 3.8 percent.

So, if factory output was at 100 in January 2018, it has risen to just 101 in three years. On the other hand, if our population was 100 in January 2018, it has risen to nearly 103 in the same period. In effect, per person availability of manufactured goods has dropped by 2 percent in three years.

Even if we compare the two years before COVID, per capita availability of manufactured products grew at a measly pace of just 0.8 percent per year between January 2018 and January 2020.

Shortage of Demand

The real problem is that just like my imaginary friend Vikas, India’s economy has no appetite. We have had a serious shortage of demand for the past several years. If people don’t buy what factories are producing, then at first inventories will build up. Factories will stop running regular shifts and cut down output significantly to get rid of the stock in their godowns. After a while, the manufacturing sector will settle into a rhythm of lower output to match lower demand.

As demand shrinks, bigger companies with deeper pockets will offer discounts to capture a larger market share. Smaller companies will be unable to compete against such predatory pricing and either shut down or sell out.

So, even if a bigger company’s market increases, it will simply buy out idle manufacturing capacity at low prices, instead of buying new machines and building new factories. So, while consumer good volumes will shrink, the market for capital goods will reduce at an even faster rate. We can see this clearly in the January data.

While output of consumer goods has fallen by 4.2 percent compared to last January, the production of capital goods has gone down by 9.6 percent.

But the overall drop in consumer goods output hides a bigger story. The first is the difference between consumer durables and non-durables. The production of consumer durables, which range from blankets and plastic chairs to refrigerators and passenger cars, dropped by just 0.2 percent. The output of consumer non-durables, which range from jams and butter to toothpaste and medicines, dropped by 6.8 percent.

Diving Deeper Into Data

A deeper dive into the output data at the level of individual items gives us a clearer picture of the problem. The IIP numbers tell us that manufacturing began to recover from October 2020, so I will take the cumulative data from October to January and compare it to the same period in the previous fiscal. This tells us that consumer goods used by the more affluent have grown reasonably well, while those consumed by the less well-off have performed badly.

For instance, the production of water heaters and geysers has increased by 60 percent, electric cooking appliances grew by 43 percent, output of computers increased by 39 percent, electric heaters by 38 percent, washing machines by 31 percent, TV sets by 29 percent, air conditioners by 14 percent, refrigerators by 12 percent and passenger cars by 4 percent. All of these are likely to have been bought by the top 10 percent of Indian households.

On the other hand, gas stove production dropped by 83 percent, plastic tarpaulin output was down 46 percent, aluminium utensils dropped by 40 percent, stainless steel utensil output fell by 27 percent, air cooler production dropped by 12 percent, toothpaste fell by 6 percent, atta by 17 percent, dal by 8 percent, besan and sooji by 7 percent, regular watches by 27 percent, ready-made garments by 34 percent, quilts by 23 percent and even bidi by 6 percent.

These are all the items which are also bought by the bottom 90 percent of Indian consumers.

A Slow-Growth Trap?

Here lies the real story of why India’s recovery is taking place through fits and starts.

As the economist Rathin Roy has said in the past, India is stuck in a zone where our economy caters to a small part of our population – those who are right at the top.

While this population is still very big in terms of absolute numbers, it is not enough to sustain long-term consumption and investment growth.

Till we are able to provide decent earning opportunities to a vast majority of people – which will stimulate the production of mass-consumption goods – India’s economy will continue to be in a slow-growth trap.

(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets @AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)