Source: Economic Times


Our estimate for growth in the first quarter was on target at 5.5%. However, this hardly brings any cheer: growth has been contained below 6% for the last two quarters and there are no positive signals for a pick up this year. We have now moved into a trough and there is no certainty whether the next year will be much better. There has been a lot said and written about what has led to this slump — global concerns are deep, and the picture coming from China is not at encouraging: its economy that was leading well ahead of all other economies is now hitting a wall.


In India, all sectors have been hit for various reasons. Despite revival of the monsoon towards the end of August, some crops such as pulses remain a sticky point. On manufacturing, the less said the better: leave aside the disconnect between negative official estimates and slow but positive growth in corporate sales along with a PMI that has not shown a contraction, the fact is that the IIP has turned in negative for four months over the past year. Going ahead, though there will be some relatively bright spots of 4-5% growth, thanks to the base effect, on an average, manufacturing IIP is not expected to be grow faster than 1-2% this year. In mining and electricity, neither has any fundamental reason to turn around either, while their poor performance drags down manufacturing performance. The key for future growth, of course, lies in investment levels, and here the situation is grim, with policy logjams in a status-quo mode. At this juncture, it is extremely difficult to kick off a turnaround, what makes matters worse is the platitudes that come from the policy circles. In any case, even if there is any move now, its impact will be felt on growth only with a lag for 2-3 quarters.


When it comes to inflation, there is some stability in inflation numbers, though they remain uncomfortably high. Global crude price has spiked, leading to the highest aviation fuel price ever in India, while domestic fuel revisions remain a farce, putting pressure once again on the subsidy bill. Now with the drought, there is even more resistance to changing diesel prices. Unfortunately, the government still refuses to communicate clearly the costs of this inaction to the public in whose name it is running up high bills.


So, slump in growth and high inflation — what does this mean for the RBI? The high rates have hurt badly so far, and as we had pointed out last month, a tight monetary policy was aimed at growth and would do little to stem inflationary pressures. Given that rate cuts appear to be the only policy move that can be expected in the near future, there is a high probability that the central bank will have to give in now and focus on stimulating growth, rather than on tempering inflation expectations. However, it is also true that a marginal rate cut will hardly revive the growth environment; a large rate cut, on the other hand, will hit bank deposits and savings. There are, of course, no easy solutions to the mess we have got ourselves into. 


According to the Prime Minister, international events and lack of cohesiveness in domestic politics are the two major factors that have prevented the government from laying the foundation of 9% growth. Given that nothing can be done by India to fix the global concerns, one way to get out of the trough we are in seems to be early elections that can break the impasse and cause fresh alignments.