Source: Economic Times
The year began on a disturbing note. Data released showed two low points — both fiscal and current account deficits — at worrisome levels. True, these numbers were not unexpected. However, the bigger concern is that even now there is very little that the government has to offer in terms of solutions. It is true that these core macro imbalances have no short-term answers. However, there is hardly any vision on statements coming from policymakers.
For example, the high level of twin deficits triggered talks of raising import duties on gold. However, if we are looking for an answer to reduce gold imports, it is important to address the lack of investment options and persistent inflation that make gold so attractive. Again, one common link in both these deficits is the huge fuel import bill and associated subsidies. Yet, there is no roadmap on oil deregulation. Every time we see the government being reactive rather than proactive, addressing the symptom and not the problem. This is hardly the way to steer the economy out of the woods.
The IIP number for October was surprisingly high. However, the November data is set to bring us back to the ground with a thud. To take just one instance, the October IIP growth included a 37.4% rise in production of passenger cars. But the Siam numbers showed production drop by 12.4% year-on-year in that segment in November. The month also saw negative growth in coal, natural gas, cement and lower growth in electricity, steel and petroleum refinery. At the core, therefore, the situation remains fairly bleak. Meanwhile, the PMI numbers for December showed a pickup: manufacturing numbers were better than the last five months, but lower than the levels of the first half of 2012. Though this quarter will see better IIP growth, averaging 4%, this will stem more out of the base effect from extremely low numbers last year, rather than from any significant recovery in the economy.
On inflation, the WPI numbers at 7%-plus levels may look bearable, but that is because all of us got so used to 9% last year. Primary nonfood articles, especially oilseeds, reeled under double-digit inflation in November. Inflation, measured in terms of WPI, touched 16.5% in November. And pressures continue to persist today, as shown by Indicus Price Monitor that tracks real-time prices of agricultural commodities.
High stress is seen in some basic agri commodities such as wheat. Also, there are other basic items where we see high WPI inflation — electricity, sugar and fertilisers are just some examples. All these feed into manufactured prices, and the HSBC Markit data shows input prices rising for the 45th consecutive month in December, leading to higher output prices. Inflation is not subsiding any time soon.
Moreover, as the RBI has not forgotten its inflation benchmark of 4-5%, the tussle with the government on rate cuts is bound to continue. This is obvious from RBI governor D Subbarao’s recent speech reiterating the need for independence of the central bank. Of course, a cut of 25 basis points this monthend could keep both parties happy, but unfortunately, would not change the ground situation much either way. What is needed now, as people and government know, is a stronger and more credible commitment to rein in the deficits. To give it some due, there have been some positive steps taken in the last year, but they have been muddied by shoddy implementation. Take the partial removal of LPG subsidies — the government imposed a cap on six cylinders — but with little clarity about its implementation at the ground level. This only added to confusion for state governments and oil PSUs. Or take the example of the government’s efforts to accelerate direct cash transfers on some schemes — a good plan in principle — but linking it to the Aadhaar card when there are huge gaps in coverage creates confusion among local authorities and beneficiaries. So, even when the intentions are good, implementation leaves much to be desired. That leaves us stuck where we are; this economy is not set to see the good times this year.