Source: Economic Times

Two years ago, we said in this column, "There is a serious inflation problem, that will not go away soon." This continues to hold good today. There may be some cheer that manufacturing product inflation has currently moved into a comfortable zone of less than 5%, but other indices are not giving much relief. 

This is in line with results from Indicus' real-time monitoring of primary prices that picked up the rise in oilseeds, pulses and fruit and vegetables before they showed in the wholesale price index (WPI). Now, both the consumer price indices that showed a dip in inflation for just a couple of months have moved up again. 

Primary food articles that had fallen sharply in December 2011 wentsteel consu negative for January 2012 and then surged, as predicted by us, with inflation springing back to 9.9% in March. Net-net, inflation overall in WPI is not expected to decline dramatically, it will average around 7% this year; manufacturing product inflation that will stabilise in the 4.5-5% range is, however, subject to shocks from the input side again. 

To take just one example, the World Steel Association has projected acceleration in steel consumption growth in India this year to a brisk 9.9%, putting pressures on capacity. On the crude oil side, while international prices have fallen, they are still higher than December, when domestic prices were last revised. The need to deregulate fuel continues to be urgent and, unfortunately, shows no sign of being addressed. 

Data shows opposing forces still struggling with each other. On one hand, the macroeconomic aggregates of inflation, slowing growth, worsening fisc, export slump and current account deficit, not to mention policy paralysis, are pointing to a significant growth stagnation that will last for some time. 

On the other hand, we have the World Steel Association reporting higher growth in India's steel consumption, auto sales doing better than expected in April, CII reporting improved business confidence and the Indicus MSME Business Confidence Survey showing higher levels in the January-March quarter than last year. 

To add to that, the HSBC-Markit PMI is quite stable. While output rose at its weakest pace in 2012, the managers reported that constraints in production came in from power shortages, not from lack of demand - new business actually grew faster in April than the previous month. 

Are Indians being driven more by misplaced optimism than the negative signals coming from Delhi and Mumbai? Or is it that the pessimism of financial markets is misplaced and the demographic dividend continues to shower its blessings on India through all these macroeconomic imbalances? 

At this point in time, we are inclined to believe the former as the probability of a crisis is now higher than before. Yet, the optimism and the stable PMI should not be shrugged off as they go a long way in providing positive strokes in the spreading gloom. 

So, from where we stand today, the lower bound on inflation is 7% and upper bound on growth is also 7%. That's the best we can do this year and, in all likelihood, we could do worse. The Reserve Bank of India (RBI) finally realised that it can do nothing about inflation and reduced interest rates, but that won't do much to growth either, though it may reduce the government's interest burden a bit. Unsolicited advice to the RBI: build up forex reserves, you don't want to be caught napping as you were a few months ago. 

It's not that the government is paralysed, it does move, but is trotting backwards to the starting line. The fuzzy new tax provisions helped lower India's attractiveness as an investment destination and April was the first month in the last four to see a net FII outflow. The consequent slide in the rupee has again brought out the challenges posed to the RBI. 

True, all emerging market currencies fell, as they do in worsening global sentiment, but the rupee has a higher burden of a rising current account deficit and extremely negative policy perception. Both these factors were instrumental in putting India's credit rating on watch, and on both these fronts, the government and the PM bear a higher responsibility