Source: Economic Times

 

The government just does not get it. With growth in the 5% trough and inflation at 7% levels persistently, there are still no moves towards making a turnaround. Finance minister P Chidambaram’s statement saying the government has accepted the recommendations of the Kelkar Committee on lowering fiscal deficit targets failed to impress the RBI. The central bank knows, as do hapless consumers, that the time for talk is long past. Let us be clear on one point: the persistence of inflation has been a problem for long. And the RBI’s policy so far through intervention in interest rates has done little to curb the rise. By not cutting rates, what the RBI has done is to send out a very strong signal. However, it isunlikely that this will jolt the government into change. The result is that the economy is caught in the bind of high inflation and low growth for the year ahead as well. 

 

For long now, it has been known that the pricing pressures have come from basic inputs and wages. The question is: what will be their trajectory ahead? Primary food products have heightened inflationary pressures, at the base of which lie higher minimum support prices, as well as unfavourable weather for many crops. For a turnaround in prices here, the rabi output will be crucial this year. However, its impact will be seen only by February. For now, Indicus Price Monitor, which tracks real-time prices of more than 60 crops, shows no signs of price pressures abating significantly. 

So, for this quarter, WPI inflation in this space will continue in the 8-9% range. 

Then there is fuel pricing, where government policy has completely fudged the picture. A rational fuel pricing policy is clearly not forthcoming from this government; the small spikes once in a while will also run out with an eye on polls, leaving a higher burden on oil marketing companies (OMC) and the fiscal deficit. With high crude oil prices and rupee depreciation, under-recoveries borne by the OMCs for the first six months of this fiscal year work out to almost double the petroleum subsidy budgeted for the whole year. The government is yet to make payments to the OMCs on their share of losses this year, but the impact on the fiscal deficit and, consequently, on inflation is quite obvious, going ahead. 

 

And then there is manufacturing product inflation, where firms are taking the brunt of inputs and fuel price hikes as well as wage hikes. The HSBC-Markit PMI reports that in October, firms faced sharp input price hikes that were passed on to consumers. Firms in the services sector too reported strong input pressures through fuel, labour and rental charges and, therefore, higher output prices. Though the rate of increase was the slowest since end-2010, we believe that, going ahead, pressures are still too strong and a declining trend in inflation is not on the cards this quarter. 

Growth, unfortunately, also shows a dim picture. There is too much baggage from all sides, particularly from a poor monsoon and large power shortages that have been eating into production. There will be a spurt in IIP in October, primarily because of the base effect, and Diwali has moved to November this year. That will raise the growth estimate for the current quarter, yet with all the other sectors in doldrums, growth will still be in the 5.6-5.8% range.