Bad news is not ending for the economy. The November data of negative industrial production is a bigger indicator that the slowdown is going to be severe than expected.
The real meaning of negative industrial production is that investment is not picking up. There can’t be any employment and growth without investment. Inevitably the decline in industrial production will lead to loss of employment and growth in the coming months.
India’s declining manufacturing output data comes amidst strong recovery trends in the Chinese economy. Two important factors are driving investment downwards in India. Firstly, the blind focus on inflation fighting by the RBI through the adoption of high interest rate has created bigger costs for the economy.
Prof. Joseph Stiglitz in his CD Deshmukh speech (3rd January 2013) h criticized the central banks like RBI for over focusing on inflation. He described that the costs of inflation fighting in the form of high interest rate has lead to depression of consumption and investment. RBI’ monetary policy has failed o control inflation and has lead to reduced growth.
The second factor that contributed to the industrial sector decline is the energy crisis. Government has failed to generate enough electricity to match up with industrial capacity addition. Energy shortage has emerged as a macroeconomic crisis. Without sufficient power supply, there is no surprise that industrial investment falls.