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' 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.