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15 January 2016 Editorial

 

15 JANUARY 2016 

Stagflation risk ahead 

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.

 

Return of terror in Indonesia 

The multiple terror attacks in Jakarta, the Indonesian capital, which left at least seven dead, mark the return of organised Islamist violence to the country after a brief period. The Southeast Asian country witnessed several terror attacks during the last decade, including the 2002 Bali bombing that killed over 200 people. Most of such attacks were carried out by the home-grown terrorist group, Jemaah Islamiyah, which has links with al-Qaeda. An effective military campaign against the JI by the government, along with U.S.-model counter-terror strategies, helped Indonesia break up the extremist network and arrest the tide of terror strikes. But Thursday’s attack, the first major terror assault in the country in six years, has rekindled fears that extremists are regrouping themselves at a time when it is going through a tough economic phase. Indonesia has blamed Islamic State for the attack. The apparent target of the attackers was a downtown mall with outlets of Starbucks and Burger King, as well as a diplomatic quarter in Jakarta. It’s evident that the attackers wanted to inflict maximum damage, much the same way the Bali tourist hotspot was attacked. But the plan didn’t succeed, according to initial reports, as the gunmen were stopped at the mall and sent back to a police post, where they opened fire. 

Though major attacks were halted after the Malaysian leader of the JI was killed in a shootout in rural Indonesia in 2009, Jakarta has stepped up security measures in recent times in the wake of growing Islamist challenges. If militants radicalised at home and trained in Afghanistan posed security challenges in 2000-09, now radicalised youth get military training in Syria and Iraq. Up to 700 Indonesians are estimated to have travelled to Syria and Iraq to join Islamic State. The government has expressed concern that their return would reinforce the broken extremist networks, bringing back another phase of organised violence. There was a massive crackdown on suspected Islamists on New Year's eve. For the Islamists, Indonesia has always been a high-stakes game. Though their influence among Indonesian society is negligible and their networks were broken up by the state, the latest attacks show they still possess the capability to hit life. It is bad news for the government of President Joko Widodo, which faces the challenge of rejuvenating an economy hit by a slowdown and falling commodity prices. Mr. Widodo, who came to power in 2014, has been trying to portray Indonesia as a peaceful, stable place to attract investments to fund growth. Terror attacks would certainly make his job harder. A bigger challenge is to prevent the return of attacks along the model of the last decade. To stop Islamists making inroads into the world’s largest Muslim society, the government has to take on both the extremist organisations and the extremists’ ideas. President Widodo should not let Islamists have their way.

 


 

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