Source: Economic Times

The stance of the government is quite clear: all the talk about intent to rein in fuel subsidies was negated by just one sentence in the Fiscal Policy Strategy Statement, "With respect to rationalisation of petroleum subsidy, government has already decontrolled the pricing of petrol."


The fact that the petrol prices have not changed in Delhi since November, even as the crude basket price rises, speaks for itself. To take another example, for all the talk about encouraging foreign investment, the turnaround in tax laws has stunned the markets.


To make matters worse, the debate that should have focused on where our economy was headed was overtaken by drama caused by coalition politics. Not only are we deprived of any serious talk, credibility is so low that any positive reassurances for the future are now looked at sceptically.


Enough has been said, both within the government and from analysts, about structural problems plaguing our economy. As we have been saying for long now, the problems and their solutions are well known.


Yet, now we have an added issue: recognition of the structural deficit in the mindset of our policymakers and in governance. We are, therefore, stuck in a rut. Gone are the years when we spoke of achieving a double-digit growth path - we are now back to getting the basics in place: bijli, sadak and paani.


And still there is a lot of hope around that things will take a turn for the better sometime soon. The MSME Business Confidence Survey conducted by Indicus Analytics showed an overall brighter picture this quarter than it did last year at the same time.


Official data will reflect better numbers than the past quarter, the IIP with all its volatility is trending up now: while the January number surprised all forecasters by turning in growth close to 7%, in February too, core sector output rose by 6.8%.


For all the twists and turns in the 'statistically bewildering' IIP, we can still say that there is a high probability that IIP growth will now move up into double digits by October.


The HSBC Markit Manufacturing PMI moved down marginally in March but the order book index is still expanding. This is also corroborated with anecdotal evidence from firms. In any case, going forward, the interest rate regime will favour this turnaround, as the RBI will take small calibrated steps downwards from this month's policy review.


The reason why the steps in the rate-cut cycle will be small and calibrated is that inflation hasn't been conquered yet. In fact, consumer price inflation just edged up in February, reversing a decline over the last four months. Fuel price adjustments remain a ticking bomb and, going ahead, as mentioned earlier, the high fiscal deficit and the low rupee will continue to feed pressures.


Meanwhile, under-recoveries registered sharp rises: according to the ministry of petroleum and natural gas' latest figures, the under-recovery on domestic LPG increased from Rs 439.50 in March to Rs 570.50 effective April 1.


Interestingly, if you want to see a brighter picture for sales, look into the countryside. Auto manufacturers are making a beeline for tier-II and III cities and tapping into the villages for higher sales. Electronics firms are also heading out, discovering new territories. Whether it is the effect of MGNREGA or higher land prices, it is now confirmed that rural consumers are less dependent on agriculture and have more disposable income.


These consumers do not depend on bank credit and are more comfortable with the cash economy, and there is a lot of cash going around. With urban Indians reeling under high food prices, higher rents, higher transport and education expenses, the rural story may look happier at the moment.


The problem is that a system that runs on transfers is bound to lose steam and unless the economy is put on a higher productivity path, inflationary pressures will persist. And that is where we are stuck.