Source: Economic Times
Amid the gloom of finding ourselves in a slow-growing economy with high inflation, there is a ray of hope. The repo rate cut by the Reserve Bank of India (RBI) came after a nine-month period of no changes and government accounts show slightly improved fiscal deficit numbers in December 2012.
By themselves, neither of these will have a significant impact on growth or inflation. Nevertheless, taken together, they point to the two authorities coming to some sort of a middle ground. The RBI had stayed rate cuts to put pressure on the government to get moving on the alarming fiscal deficit situation; now, with some tightening on the Plan expenditure front and diesel prices being slightly freed, small steps have been taken to prevent a run on the fisc.
Though these baby steps have gladdened the stock markets, there are many more such steps to be taken for India to come out of the trough. Growth figures have been revised downwards for the previous year and estimates for this year are steadily dipping to around 5% levels, if we are lucky.
As forecast in the last column, the high point of October’s index of industrial production did not carry forward to November, and the next three months will see growth average around 2.5%. The Markit PMI has shown that manufacturing just managed to keep its head above water, though respondents have cited power shortages as a key constraint to growth. Core sector data shows lower growth in the April-December period than the previous year: while refinery products, coal and cement have expanded compared to the year-ago period, electricity has turned in a low performance. So, if there is one thing that the government should focus on that will charge long-term growth, it is the power sector. There are a number of policy measures that can change this sector. Although the impact will only be felt over time, this is an imperative and the costs of non-attention are increasing by the day.
Inflation, of course, looks subdued compared to earlier, though primary products and fuel and power are segments that are still at double-digit inflation levels. With the price of Indian crude rising in January, the government is being pushed to deregulate diesel prices in small doses, and this would make its mark on inflation. Again, this is a long overdue step.
Sure, there are political and consumer pressures in raising fuel prices. And here, the government has failed to send out correct signals for years after it reintroduced the administered price mechanism in 2004. One of the reasons behind our large fiscal deficit is the reluctance to expose the economy to the realities of crude prices.
But there are other pressure points. Inflation in basic food items is hurting consumers. Why is it difficult for the government to be in sync with the aam aadmi here? Our Indicus Price Monitor in November flagged the rising prices in onion. Today, retail prices of the commodity are double of last January’s levels and the government is only now looking to take action.
Wheat is another basic item where prices continue to stay high. Despite large stocks with the government, retail prices of wheat and atta have been continuously rising over the last 12 months. And, ahead of another huge harvest, the FCI is now sending a team abroad to ‘understand’ exports, storage and logistics issues! We have built a system that responds to high-impact issues in a bureaucratic manner: react rather than pre-empt is the basic instinct. This is why it is increasingly difficult to trust the government to come up with effective solutions. This is why economy is moving down on the growth trajectory and inflation is high. And this is why the year ahead is set to be the same.