Two years ago, our column said, "There is a serious inflation problem, which is not going away soon". This continues to hold good today. There may be some cheer that Manufacturing Product inflation has currently moved into a comfortable zone of less than 5%, but other indices are not giving much relief. This is in line with results from Indicus' real time monitoring of primary prices that picked up the rise in oilseeds, pulses and fruits and vegetables before they showed in the WPI. So now both the consumer price indices that showed a dip in inflation for just a couple of months have moved up again. Primary Food articles that had fallen sharply in December went negative for January and then surged as predicted by us, with inflation springing back to 9.9% in March. Net net, inflation overall in WPI is not expected to dramatically decline, it will average around 7% this year; manufacturing product inflation that will stabilise in the 4.5-5% range however is subject to shocks from the input side again. To take just one example, the World Steel Association has projected acceleration in steel consumption growth in India this year to a brisk 9.9%, putting pressures on capacity. On the crude oil side, while international prices have fallen, they are still higher than December, when domestic prices were last revised. The need to de-regulate fuel continues to be urgent, and unfortunately shows no sign of being addressed.

Data are showing opposing forces still struggling with each other. On the one side the macro-economic aggregates of inflation, slowing growth, worsening fisc, export slump and current account deficit, not to mention policy paralysis are pointing to a significant growth stagnation that will last for some time. Though the postponement of the GAAR to next year is welcome, the damage inflicted on the economy through the lack of clarity over the past month remains irreparable.

On the other hand we have the World Steel Association reporting higher growth in India's steel consumption, auto sales doing better than expected in April, CII reporting improved business confidence and the Indicus MSME Business Confidence Survey showed higher levels in the January-March quarter than last year. To add to that, the HSBC-Markit PMI is quite stable. While output rose at its weakest pace in 2012, the managers reported that constraints in production came in from power shortages, not from lack of demand- new business actually grew faster in April than the previous month. Even the Services Sector did better in April with strong new business orders.

Are Indians being driven more by misplaced optimism than the negative signals coming from Delhi and Mumbai? Or is it that the pessimism of financial markets is misplaced and the demographic dividend continues to shower its blessings on India through all these macro-economic imbalances? At this point in time, we are inclined to believe the former as the probability of a crisis is now higher than before. Yet, the optimism and the stable PMI should not be shrugged off as they go a long way in providing positive strokes in the spreading gloom.

So from where we stand today, the lower bound on inflation is 7% and upper bound on growth is also 7%. That's the best we can do this year, and in all likelihood we could do worse. The RBI finally realized that they can do nothing about inflation and reduced interest rates, but that won't do much to growth either, though it may reduce the governments' interest burden a bit. Unasked for advice to the RBI - build up the forex reserves, you don't want to be caught napping as you were a few months back.

It's not that the government is paralyzed, it does move but is trotting backwards to the starting line. The fuzzy new tax provisions helped lower India's attractiveness as an investment destination and April was the first month in four months to see a net FII outflow. The consequent slide in the rupee has again brought out the challenges posed to the RBI. True, all EME currencies fell, as they do in worsening global sentiment, but the rupee has a higher burden of a rising current account deficit and extremely negative policy perception. Both these factors were instrumental in putting India's credit rating on watch and on both these fronts, the government and the PM bear a higher responsibility than they currently accept.

Tracking inflation in real time

With our real time inflation monitoring of primary food articles successfully pointing out the impending rises in oilseeds, pulses and fruits and vegetables over the past three months, this month the rising pressure in soyabean has been highlighted. As mentioned in our previous columns, while the levels of inflation would differ between the IPM and the WPI due to their different methodologies, the broad trends remain in place. The IPM index for oilseeds as a group continues its steep rise since the beginning of the year, as shown in the graph below. Globally the pressures in oilseeds have sustained as shown by the FAO Food Index, with output of soyabean especially dropping by 10%, a record in any year. The drought in prime producer Argentina led to decreased output estimates this year, causing a surge in prices worldwide. FAO in fact has now predicted even higher price movement ahead, given the tightness in the market.

With soybean output in India dropping by 3.9% in FY12 compared to the previous year, inflation has picked up considerably, especially since March when the global situation became clearer. With increased returns on the crop, farmers are expected to raise acreage during the coming kharif season, boosting output next year. Madhya Pradesh and Maharashtra are the two main producers of this crop, and it is likely that the high prices realised this year will divert area from other crops that have been less lucrative. A higher output will also augur well for our oilseeds imports next year, for these expectations to come through, however, a normal monsoon is crucial.