The economy is going through a bad patch, and at times like these, the question that comes to mind is whether there is something to look forward to ahead. The negatives have been in place for some time now – sustained inflationary pressures, large fiscal and current account deficits, low credit growth, depressed global environment etc. all feeding into each other. On some accounts though there may be hopes of a small turnaround in global growth and as a buzz builds, a reversal of business sentiment can well come into place in India. While on one hand there is ample anecdotal evidence that things are picking up, estimates from the IMF, OECD etc also confirm the higher likelihood of the world economy doing better this year than the last. Of course, there are serious concerns that persist and we are still far away from any certain breakthrough, yet it must be noted that global expectations are changing around slowly.
Meanwhile at present the conditions within India are not encouraging. With the budget behind us and the election year promising little for policy reform to revive industry, domestic worries are high. Despite the moderation in the WPI, especially in manufacturing inflation, the stresses in primary items continue to come through strongly in the official consumer price indices that have shown higher inflation over the last four months. The Indicus Price Monitor that tracks agri commodity prices in real times shows a similar trend, i.e. overall moderation since December yet high levels continuing through March. There is significant pressure in cereals and pulses, oilseeds etc. that is not quite set to come down in the near term. So with current trends, the dip in headline inflation will not continue beyond the second quarter of this year, the average inflation will still be 7% this year.
With the RBI’s high sensitivity to inflationary pressures, therefore, rate cuts will be kept to the minimal, just enough to keep the government off its back. Though the commitment to lower fiscal deficit has been indicated, caution will prevail within the central bank. In any case growth is unlikely to be kicked off through rate cuts, credit growth is currently lower than what it was last year and industry sentiment and expectations for the long term need to be targeted. Though the HSBC Markit PMI shows expansion in new orders even in March, these were at the lowest level in 16 months, the IIP will average around 3% over the year as domestic growth drivers are missing.
Talk of double digit growth is now forgotten and we are paying the price of the excesses of the past years. We are stuck in a high deficit low growth phase; unfortunately the government keeps cueing policy and even industry towards welfare measures, while measures that raise productivity and employment are actually much more crucial. Until this signal comes through, even the 8% growth target will remain elusive.
P.S. Indicus has been tracking real time prices for 62 commodities over the past year and the indices are now available on our website.