Amid wide expectations that the Indian economy is on the
mend, an analysis of the various economic data that are released
periodically assume plenty of importance. That the economy will finally
break out of the sub-5 per cent growth phase during this current fiscal
seems certain. But how much above 5 per cent will it clock still remains
a matter of interpretation. Forecasts of growth have varied from 5 per
cent to almost 6 per cent with the Reserve Bank of India sticking to 5.5
per cent while many private forecasters are estimating slightly lower
rates of growth. The International Monetary Fund (IMF) and the World
Bank have estimated the Indian economy to grow at around 5.4 per cent
this year. But in a welcome development, the global institutions, along
with a fair number of other agencies, believe that 2015-16 will see the
economy climbing even higher to above 6 per cent.
It
is trite to point out that the validity of these forecasts will depend
on how the intermediate data pan out — for instance, the monthly Index
of Industrial Production (IIP) data and, of course, inflation details.
Equally obvious should be the role of policymakers — the government and
the RBI — in creating conditions for growth through getting a handle on
inflation and removing structural constraints. It should be clear that
any improvement in the macro economy will depend on all these factors.
The fluid global scenario, geopolitical as well as economic — will
naturally matter.
How do recent data — on industrial
output and inflation — impact the growth assumptions? Admittedly, these
are for just one month — the IIP for August and the inflation data for
September. Analysts look for trends. Can one month’s data be
extrapolated to cover a year or longer? The IIP data have often been
faulted for being inconsistent and volatile. Even so, there was a lot of
expectation this time that the August data would confirm the beneficial
trend that seemed to have set in over the previous few months. Almost
all estimates suggested a 2 per cent year-on-year growth in August. In
the event, the actual 0.4 per cent growth has been a disappointment. The
bellwether manufacturing that accounts for roughly 80 per cent of the
IIP declined by 0.2 per cent. However, notwithstanding the lacklustre
performance in August, industrial output has grown by 2.8 per cent in
the April-August period over last year. This is not bad by the standards
of previous years.
Does the August figure cast
doubts on the sustainability of the recovery? The sluggishness in
industrial growth is primarily due to a fall in capital goods and
consumer durables by 11 and 15 per cent, respectively. The decline in
these two sub-sectors is against the run of their recent positive growth
and the consensus view among analysts is that it is only a temporary
setback.
Supporting that view, key sectors like basic
metals and non-metallic mineral products continue to post growth. More
importantly, government’s efforts to revive industry are beginning to
bear fruit.
For the macroeconomy, the single
important development has been the steep fall in global petroleum
prices. It is already conferring triple benefits — a lower current
account deficit because of lower import bill, a narrowing of the fiscal
deficit as the subsidy burden gets reduced and a sharp fall in
inflation. Inflation figures, which came subsequently, exceeded the most
optimistic expectations. Consumer price index-based retail inflation
eased to 6.46 per cent in September, the lowest since this series was
launched in January, 2012. In August, it was at 7.73 and a year ago (in
September, 2013) at 9.84 per cent.
The Wholesale
Price Index (WPI) for September dipped to a five-year low of 2.38 per
cent, the lowest in five years and much lower than the 3.74 per cent
recorded in August. The fall in food prices is the main factor behind
the declines in inflation measured by both indices. While food has
different weights in the two indices, the sharp fall in the retail index
by as much as 1.68 percentage points in September over 9.35 per cent in
August is illustrative.
Looking ahead, the fall in
inflation may not be linear. Estimates of foodgrains and pulses
production in the kharif season indicate a shortfall over the previous
year. Considering that the fall in food prices has occurred in a year of
mediocre monsoons, the government’s deft food management has come in
for praise. It included open market sale of wheat and rice from its
buffer stock: putting a lid on procurement prices and discouraging
states from offering additional incentives.
Finally, the big question: how will the RBI react to the latest industrial output and inflation numbers?
A
lower IIP would suggest an interest rate cut. The sharp declines in
inflation reinforce that view and have actually increased the clamour
for one. The RBI has set a target of 8 per cent for retail inflation by
January, 2015, and 6 per cent a year later.
The
central bank has held the view that the near-term target is achievable
but there may be obstacles to achieving the 6 per cent target by
January, 2016. It is to be seen how the RBI and the government react to
sharp falls in inflation numbers.
Special thanks to,
Mr.
Interview Team
MAHENDRA EDUCATIONAL PVT LTD
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