The growth gloom gets deeper as the IIP refuses to come out of the red and the HSBC Markit PMI shows contraction in service index, even as the manufacturing index is stagnant in July. The core sector estimates for June have been bleak, and vehicle sales are down through July. Credit growth has been considerably lower than last year and the expectation for lower rates, that could have given some signal to stimulate growth, is clearly not going to materialise this year. The central bank is holding out on rate cuts, and the reason is obvious - on the external front, the situation has been critical for long and the rupee is facing immense pressures, this slide has of course been overdue. While this seems to be obvious, the government is flapping around looking for some kind of solutions, changing FDI norms for instance. But can these really make a difference when the core is rotten and the time for quick fixes are long gone? So what will make a difference?
Look at the inflation scenario to get another perspective of the same problem. Prices of basics like rice, wheat, potatoes and onions are not on their way down, though a good monsoon can mean lower pressures for some items like oilseeds, pulses. On the other hand, underlying all price pressures is the fall of the rupee hitting the crude oil bill hard and fuel hikes are inevitable. For companies, the input costs are also rising with the rupee depreciation. So even as the WPI manufacturing products inflation has fallen below 3%, for the firms the future does not look very bright. All this is of course happening because the structural problems that afflict our economy are not being addressed.
To take care of the rupee fall, the government has moved to relax FDI norms to attract investment, unfortunately this does not help solve our core issues of land acquisition, power shortages, poor roads etc. In fact, we are now in a rut because there has been no long term vision. Most importantly we are suffering from a massive trust deficit and any superficial moves will not push the economy back on track. There are more than a hundred bills pending to be cleared and getting key bills passed this monsoon session can in fact be the single biggest boost to the economy. Potential investors within and outside the country need to be convinced that the government is working towards a road map to clear hurdles, they need to see clear positive action with a view to some committment in the long term.
We can go on talking about how 6% growth is such a wonderful number ‘in the circumstances’, and yet know deep inside that the costs of such low growth are mounting on the electorate. Pushing India out of the low growth-high inflation trough needs some strong moves. Everyone knows that depending on the central bank every time to pull India out of a mess can only go so far, in the end if we are to see a year ahead that is different from the last two, this government needs to get its legislative act together.
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.