The Correlation Between Indigestion And Economy. Ridiculous, But True

Published: November 13, 2018 17:24 IST

Like all true Bongs, my tryst with dyspepsia started early. By my mid-twenties I was able to distinguish between such Bengali staples as Famotidine & Lansoprazole. This made me the butt of much boorish north-Indian laughter, but now, it is time for me to have the last laugh. Without people like me, the economy would be in deep trouble. 

How, you ask? Just look at the Index of Industrial Production or IIP. The biggest contribution to the growth in IIP came from one particular segment - 'Digestive Enzymes and Antacids' - the industry patronised by yours truly and millions of other Bengalis.

This subsector of India's pharmaceuticals industry accounts for just 0.22% of the country's industrial output. But when it comes to contributing to output growth, it punches way above its weight. The government has published output data for the 'Digestive Enzymes and antacids' subsector for 15 out of the 18 months between April 2017 and September 2018. The IIP grew by an average of 4.4% over these five quarters and drugs to treat heartburn and indigestion contributed 23% to this additional output.

An industry group that has a weight of less than one-fourth of a percent in the IIP contributed nearly one-fourth to India's industrial growth. Without the positive impact of dyspepsia, IIP growth for the past 1.5 years would have been just 3.4%, and just 3.6% for September 2018. 

If you are finding this data hard to digest, just go to the Ministry of Statistics and Programme Implementation site and check it out. 

If you're finding it ridiculous, that's because it is. 

India's IIP data is simply not trustworthy. At best, it gives us a basic sense of the fortunes of our factories, but it's probably no better than the sense you'll get by simply observing what people around you are buying and what the shops in your neighbourhood are selling. And every indicator there is pointing to a deep and steady slowdown. 

What's worse is that this slowdown has come at a time when raw materials are getting more expensive. Most corporates are complaining about rising input costs putting pressure on their profit margins. Earnings of listed companies in the September quarter have dropped to an eleven-quarter low and one of the biggest international brokerages has cut its estimate for Nifty earnings this fiscal by 5.5%.

Even consumers like you and I are facing higher inflation in almost everything we buy, except for food, fuel and electricity. 'Core' retail prices - excluding those of food, light and fuel - have risen in October 2018. That's because companies are passing on some of their increased costs to us. The good news for us is that global oil prices have dropped by 15% in one month, and that has brought down what we are paying at the local petrol pump. Even better, food inflation for October was - 0.14%, which means food items are cheaper than what they were in October last year. 

But what's good for us is bad for farmers. Food prices have dropped right when farmers have harvested their crops. That clearly means they haven't got the higher MSPs (Minimum Support Prices) that the government had announced. Regional newspapers have reported stories of farmers selling vegetables below the cost of transport, of farmers killing themselves as they have no way to pay back the loans they've taken. So, we are getting cheaper food, but farmers are going hungry. 

Ultimately, you and I will also pay for the way prices are moving. Low food prices mean low overall consumer price inflation, something employers watch to decide on raises. On the flip side, higher 'core' inflation means higher input prices for corporates and, consequently, lower profits. Your employers will be under pressure to cut costs, and that could mean lower raises, pay cuts, or even downsizing. 

High core inflation also has an impact on interest rates. The Reserve Bank of India has a mandate of inflation-targeting and it uses interest rates to keep price rise within 4-6%. If inflation drops below that range, the central bank has reason to cut interest rates. Lower interest rates are believed to spur spending and investment. That, in turn, increases demand for both consumer and capital goods. Growing demand is met with higher output and further investments. 

The reverse happens when inflation goes above the range. The RBI raises interest rates to curtail consumption and investment demand and cool down the economy. Loans become more expensive, while bank deposits become attractive. Despite pressure from the government and industry, the RBI has refused to cut interest rates because it expects inflation to go up. The fact that core inflation has indeed gone up might end up strengthening the RBI's hawkish resolve. Especially because the US Fed is expected to continue to raise interest rates and the central bank will have to match it to some extent. 

The immediate future seems to be bleak for both India Inc and our farmers. Urban consumers like us will not be affected immediately, because food prices are likely to stay low. This could be a blessing in disguise for our official statisticians. The cheaper the food, the more we'll eat. And then, not just Bongs like me, but every Indian will start taking 'Digestive Enzymes and antacids'. 

Lo and behold, we'll see a big statistical boost to India's IIP.

(Aunindyo Chakravarty was Senior Managing Editor of NDTV's Hindi and Business news channels. He now anchors Simple Samachar on NDTV India.)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.

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