Source: Economic Times
One immediate impact was that the rupee swung upwards towards 52 to a dollar, but that has an indeterminate impact on growth. The rupee also gained due to cheer coming in from the European Central Bank and US Fed pledging unqualified support to their economies. However, there has to be a note of caution with the appreciation - with the basic concerns remaining unaddressed in India as well as in the west, the rupee can quite easily move in any direction - volatility and uncertainty, therefore, continue in the coming quarter.
When it comes to the impact on growth, it is clear that though these moves were a huge boost to sentiment, growth itself will not be impacted for now. The manufacturing sector is still labouring under considerable stress. Though the PMI has not shown contraction, levels are still hovering quite low. The IIP, of course, stays at dismal levels. What the manufacturing sector needs desperately is investment in infrastructure and easing of decision-making that has been holding up project implementation.
Power shortages continue to plague the sector, with hardly any growth in electricity generation. The impact of the power sector restructuring will take some time to show results. For agriculture, despite the recovery in monsoon, kharif crop sowing by the third week of September was still lower than what it was at the same time last year. Therefore, the trough in growth continues and Q3 estimates will stay below 6%. In fact, unfortunately, for all the turn in sentiment, the fundamentals for growth still remain shaky for the whole year.
What about inflation? We have pointed to the rising pressures in our columns before and reiterate that this problem is not going away so easily. Manufacturing products have already seen a small uptick, crossing 6% in August's wholesale price index, while consumer price inflation has headed back into double digits. This is not surprising. The Indicus Price Monitor that tracks real-time prices for primary food items shows sustained pressures on inflation. The upward trends are broad-based, cereals, pulses and oilseeds are afflicted with double-digit inflation.
Meanwhile, cement prices are being pushed upwards in the third quarter, iron ore prices have increased in India despite global softening and freight rates are up. For crude oil, though Brent crude has come off its August highs of $117 a barrel, the Energy Information Administration of the US projects a price level around $111 for the rest of 2012, which is still higher than the June levels of $89. Heightened inflation, therefore, will persist in this third quarter of the year, with pressure from primary food articles, fuel and basic inputs.
In fact, to combat persistent inflation, subsidy management will be the key in the long term. So, it is important to see how consistent the government will be going ahead in its new avatar. Will it implement most, if not all, of the Kelkar Committee recommendations?
Has the recognition finally gone home that it is the pricing decisions of the past that have brought the economy to this pass? The problem is that no matter what the government pulls out of its hat in the months to come, there are still too many downside risks to growth and upside risks to inflation to make the picture any rosier than it was a month ago.