This is the time of the year when India's weakest spots are exposed; despite our high growth and emerging economy status, we continue to depend on the rains to boost rural incomes and provide a cushion in a slow economy. All eyes are now on rainfall in July, which is so crucial for the kharif crop that accounts for about half the food-grain output. The consequences on inflation are of course obvious.
Every month the economy is struck with 'unexpected' shocks but the last month had a few too many, the delayed and weak monsoon being the latest. Another 'unexpected' shock last month was the RBI staying on rate cuts, despite the poor IIP growth numbers. A third was the government's and RBI's pathetic attempts at supporting the rupee. A fourth was that the frontrunner to the President's post has no replacement - and now our hugely ineffective PM, Planning Commision Chairman and head of the PMs Economic Advisory Council will get to increase the scope of their ineffectiveness into the Finance Ministry. But Indians are an optimistic lot as many surveys show and the stock market reversed its fall somewhat on the mere promise of correcting one tax related anomaly.
It is now clear that India is unlikely to have a full time FM, and the PM will run the Finance Ministry. One of the first results of this is for everyone to see, the government has announced yet another welfare program in the name of National Urban Health Mission priced at slightly above 20,000 crores annually. And it has also given in to the TMC on service tax in railways. But the PM did not get anything in return, neither on Teestha water sharing from the TMC nor on petro pricing or subsidies from the NAC. If this is how the PM plays his politics, we don't expect any important reform to occur.
On the monetary side, the RBI changed track and refused to loosen interest rates. Why is the RBI so fearful of inflation? Growth is down, international commodity prices are down, new hiring is down and so inflation is unlikely to get out of hand. True food inflation continues its marathon run, but it has a mind of its own and is not impacted by what the RBI does with interest rates.
Meanwhile the slowdown is spreading, construction activity is down, auto sales are down, hiring has slowed down - all of these are caused by and cause of a definite slowdown across urban India. Rural markets are holding up in part due to massive transfers and subsidies by the government and partly due to the major construction boom in rural India. But if the monsoons do not show up in July and August, even rural India will be hit.
Investment is already hit, government expenditures will hopefully not grow too much more, exports are being hit due to international conditions though the weaker rupee is helping a bit. That leaves domestic consumption, for the last two years it is this segment that has been leading the Indian economy, but it can't hold for long.
Meanwhile from the West comes one positive stroke to sentiment as Indian equities are being upgraded. The oft-repeated 'strong fundamentals' seem to be making a comeback on the rating scene, but again, that is the stock market, not the real economy.