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Finally there is some glimmer of hope on the inflation front.
Though these are early days to give any definite reversal, after the sharp up
trend in prices till the early months of 2011, the situation seems to have
stabilized ? the FAO Global Food Price Index has been steady over the past
three months, lower than the February peak, crude oil has been lower- the
Indian crude basket peaked in April, international iron ore prices contracted
for the next quarter are lower, domestic steel prices are unlikely to rise in
the coming quarter while cement prices are down and so on. Globally June saw
slower growth across all regions ? China, Euro area, UK ? and this will exert a
tempering influence on prices. Pressures from the most basic elements are
therefore off their heated levels. Add to that, inflation in food items in May
was half its level of five months ago, giving much relief and prospects of a
good monsoon make for additional comfort. Yet, thanks to the previous pressures
transmitting themselves through the system, especially in fuel, WPI inflation
in India that has been more than 8.5% for the last ten months, is not expected
to come off the 9% level for another quarter. The policy makers are now talking
of inflation moving towards 6.5% level by March-end and, barring any additional
oil shocks, this is quite possible. The hardening interest rate regime has had
little role to play in this and, we once again argue, is not the right tool to
reduce inflation.
But it is impacting investment and growth especially in sectors
where interest rates matter more. The latest negative signals have come in from
dipping auto sales and a drop in the HSBC-Markit PMI survey for June. The capex
slowdown has already been noted even though surveys have investment intentions
still upbeat for the year. According to RBI data, despite the year long rate
hikes that have been transmitted by the banks, credit appetite is still strong.
We expect growth in the new IIP series to be in the 7.5-8.5% range over the
next quarter, with some relief coming in from the base effect. Thereafter all
eyes will be on the festival season to gauge how strong the sales pick up will
be. The RBI should put in place a quick response mechanism to reduce interest
rates as good news comes in on the inflation front over the next 2 quarters.
Though a 9% growth is now out for the year, we continue to be
optimistic, expecting growth in the 8%+ range. The HSBC-Markit PMI for the
services sector shows a higher index for June, with the new business index at
its highest level since February. Clearly, the services sector is not in the
doldrums. The conducted by Indicus
Analytics for SIDBI shows that the business confidence index that had dropped
over the period September 2010-March 2011 was steady in June. In fact, a couple
of sectors, the services sector and in the basic metals industry, even saw a
marginal rise in the confidence in June, over the previous quarter.
While India has set itself to be a high-cost moderate growth
economy this year, it is the lack of credibility of policy that has more
significant long term implications. The absence of effective response to events
is all pervasive. Take for instance the dithering over the fuel price hikes,
when what is important is more effective communication about the need to raise
prices when crude itself is rising. Then take the news that the government is
now actively considering allowing exports of wheat, banned since 2007. It is
well known that India has record stocks of wheat and that prices of wheat have
ruled high over the past year ? exports, by the time they are finally allowed,
will take place when the international price of wheat is lower than ever before
in the past year. It is this typical bureaucratic response eating away into
potential earnings that lowers expectations. Even with all the talk of reform
and liberalization, it is quite clear that these kind of controls cause road
blocks for every sphere and in infrastructure the situation is probably the
worst. The compelling need to micro-manage everything and then being unable to
deliver is causing more harm than good.
P.S. Indicus is pleased to announce the launch of its Centre for Financial Inclusion, with support from the
Bill and Melinda Gates Foundation.
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