As regards the impact of demonetisation, we are gradually moving from anecdotal accounts to some fairly reliable indicators. Barring the index of industrial production for November, which surprisingly shows a growth of 5.7 per cent, the rest of the high frequency data for the last couple of months of 2016 does not point to an encouraging picture. Indeed, it is hard to take the index of industrial production seriously on a short-term basis. At best, it can indicate a trend over a period. For instance, the IIP recorded 3-5 per cent growth between April 2014 and September 2015, but except for recording a growth of 10 per cent in October 2015, the growth of the index has roughly ruled between minus 2 per cent and 2 per cent since then, touching minus 1.9 per cent in October 2016. This decline corresponds with the dip in capital formation and rising debt levels of the corporate sector; there is no evidence to suggest that demonetisation has reversed this. The IIP records trends in 682 items (620 in manufacturing and 61 in mining) on a 2004-05 base, even as the character of industry has changed since then. It relies on voluntary submission of data, without taking the informal sector, which accounts for half the GDP and 85 per cent of the workforce, into consideration. But even in the absence of direct, comprehensive data on output and employment, there are other indicators to tell us what is going on — and all point to the inescapable conclusion that the economy has taken a hit. Meanwhile, the Central Statistical Office and National Statistical Commission must at least update the base year of the factory output index to reflect the current basket of goods in the organised sector.
As for the other indicators, there has been a slump in bank credit growth — from 10.6 per cent in 2015 to 5.1 per cent in 2016. There has been a deceleration in the growth of indirect tax collections from about 30 per cent in October to below 15 per cent in December. The Society of Indian Automobile Manufacturers has said that auto sales fell 18.7 per cent in December. In a chilling reminder of the post-2008 era, real estate consultancy Knight Frank reported a 44 per cent drop in sales in Q4 of 2016.
Despite prospects of a good rabi crop, the Centre must take proactive steps in the Budget, raising spends in infrastructure and social sectors. With retail inflation up by less than 3.5 per cent for December and banks awash with deposits, the time is ripe for the RBI to effect a substantive rate cut to boost investment.