Amid wide expectations that the Indian economy is on the mend, an analysis of the various economic data that are released periodically assume plenty of importance. That the economy will finally break out of the sub-5 per cent growth phase during this current fiscal seems certain. But how much above 5 per cent will it clock still remains a matter of interpretation. Forecasts of growth have varied from 5 per cent to almost 6 per cent with the Reserve Bank of India sticking to 5.5 per cent while many private forecasters are estimating slightly lower rates of growth. The International Monetary Fund (IMF) and the World Bank have estimated the Indian economy to grow at around 5.4 per cent this year. But in a welcome development, the global institutions, along with a fair number of other agencies, believe that 2015-16 will see the economy climbing even higher to above 6 per cent.
It is trite to point out that the validity of these forecasts will depend on how the intermediate data pan out — for instance, the monthly Index of Industrial Production (IIP) data and, of course, inflation details. Equally obvious should be the role of policymakers — the government and the RBI — in creating conditions for growth through getting a handle on inflation and removing structural constraints. It should be clear that any improvement in the macro economy will depend on all these factors. The fluid global scenario, geopolitical as well as economic — will naturally matter.
How do recent data — on industrial output and inflation — impact the growth assumptions? Admittedly, these are for just one month — the IIP for August and the inflation data for September. Analysts look for trends. Can one month’s data be extrapolated to cover a year or longer? The IIP data have often been faulted for being inconsistent and volatile. Even so, there was a lot of expectation this time that the August data would confirm the beneficial trend that seemed to have set in over the previous few months. Almost all estimates suggested a 2 per cent year-on-year growth in August. In the event, the actual 0.4 per cent growth has been a disappointment. The bellwether manufacturing that accounts for roughly 80 per cent of the IIP declined by 0.2 per cent. However, notwithstanding the lacklustre performance in August, industrial output has grown by 2.8 per cent in the April-August period over last year. This is not bad by the standards of previous years.
Does the August figure cast doubts on the sustainability of the recovery? The sluggishness in industrial growth is primarily due to a fall in capital goods and consumer durables by 11 and 15 per cent, respectively. The decline in these two sub-sectors is against the run of their recent positive growth and the consensus view among analysts is that it is only a temporary setback.
Supporting that view, key sectors like basic metals and non-metallic mineral products continue to post growth. More importantly, the Government’s efforts to revive industry are beginning to bear fruit.
For the macroeconomy, the single important development has been the steep fall in global petroleum prices. It is already conferring triple benefits — a lower current account deficit because of a lower import bill, a narrowing of the fiscal deficit as the subsidy burden gets reduced and a sharp fall in inflation. Inflation figures, which came subsequently, exceeded the most optimistic expectations. Consumer price index-based retail inflation eased to 6.46 per cent in September, the lowest since this series was launched in January 2012. In August it was at 7.73 and a year ago (in September, 2013) at 9.84 per cent.
The Wholesale Price Index (WPI) for September dipped to a five-year low of 2.38 per cent, the lowest in five years and much lower than the 3.74 per cent recorded in August. The fall in food prices is the main factor behind the declines in inflation measured by both indices. While food has different weights in the two indices, the sharp fall in the retail index by as much as 1.68 percentage points in September over 9.35 per cent in August is illustrative.
Looking ahead, the fall in inflation may not be linear. Estimates of foodgrains and pulses production in the kharif season indicate a shortfall over the previous year. Considering that the fall in food prices has occurred in a year of mediocre monsoons, the government’s deft food management has come in for praise. It included open market sale of wheat and rice from its buffer stock: putting a lid on procurement prices and discouraging states from offering additional incentives.
Finally, the big question: how will the RBI react to the latest industrial output and inflation numbers?
A lower IIP would suggest an interest rate cut. The sharp declines in inflation reinforce that view and have actually increased the clamour for one. The RBI has set a target of 8 per cent for retail inflation by January, 2015, and 6 per cent a year later.
The central bank has held the view that the near-term target is achievable but there may be obstacles to achieving the 6 per cent target by January 2016. It is to be seen how the RBI and the Government react to sharp falls in inflation numbers.
(This article first appeared in The Hindu on Oct 20, 2014.)