The festive season has arrived. Crude is down, gold is down, monsoon has been good in north India and the growth numbers for Q1 show that the economy hasn?t been as badly hit by rising interest rates as feared before. Construction and services sectors continue to do well. Infrastructure sectors show stress points on crude and refinery output, coal, cement and steel sectors have slowed down but not significantly in Q1.

But the impact of interest rate hikes, power problems and inflation has seriously affected the overall manufacturing sector. There is a manufacturing growth slowdown but greater rural and government sector incomes may very well pull it back up in the short run. So this year would not be too bad and the slowdown in this sector should turn around by the last quarter of this year. On the agricultural front, rains have been good in north and east India and the retreating monsoon is providing much needed succour to west and south. Government procurement of wheat, rice etc. has been good. Food prices are therefore expected to stabilize soon.

Reforms have made a somewhat of a comeback with a new and improved unshackled PM. Expect some privatization in the next few months as that will also remove some liquidity from the system.

So rejoice, but with caution. The international economy is slowing down rapidly. Government finances are in a mess (though the books do not show it). Hidden subsidies, public sector losses, and many pre-committed expenditure items, are not helping. The Indian economy no longer has the strength that only comes with conservative budgeting. Hopefully for another year or two the external environment will be good to us. But even then India is on a long term inflation path of 6-8%, and that is not good for any economy

Bihar floods will impact agriculture growth as well. Bihar contributes on an average 4% of India?s agricultural GDP. The District Agriculture Output of India (an Indicus database) shows that significant paddy and wheat production occurs in the flood affected districts. The stagnant flood waters are expected to seep in and impact not just current but the Rabi crop as well. Effectively, somewhere around 1% of India?s agri GDP has gone down the Kosi.

P.S. As the new Governor takes over we wonder? No doubt RBI needs to reform. If reforms within the RBI were the key objective then should it not have been the Deputy Governor who so well understands the internal dynamics within the RBI and is yet an outsider? If reforms in the ministry were the key objective then should not the Finance Secretary stayed on to reform the Ministry?s functioning? We do need transparency in regulator choice. And we need a clearly laid out rationale for such decisions. But given this decision, we wish Mr. Subbarao the best. He has a tough job ahead.