The September data for Index of Industrial Production (IIP) and October inflation number come as a breath of fresh air for the economy at a time when it is mired in various ideological controversies. This should give a breather to the government and the Reserve Bank of India (RBI) alike. And given that the price of global crude has suddenly come down to $70/barrel post 4 November, there is a hope too that the rupee will regain some lost ground to the extent that it has been caused by uncertainty on sanctions on Iran and higher trade deficit.
Let us look at the inflation number first. At 3.3 percent it is more or less on expected lines. Consumer Price Index (CPI) inflation has an advantage of a high base last year for the next two months too and hence low numbers may be expected. This also means that when the Monetary Policy Committee (MPC) meets next month there will be little debate on interest rates and a rate hike can be ruled out. The tone will be important as this will be the last inflation data point available to them when taking a call. While logically an upward movement past 4 percent should be expected, the RBI’s take will be important as it will also give a clue on further rate action in early 2019.
Two things stand out in the CPI inflation number. The first is that the food items basket is responsible for this low number. While vegetables, pulses and sugar are the three products which have caused this marginally negative growth in prices, the question to be asked is whether or not the farmers are getting high prices. One may recollect that the minimum support prices (MSPs) have been raised quite aggressively for all the kharif crops by around 8-12 percent while the rabi will be up by 4-5 percent. The idea was to give the farmers a higher price and income which is critical in a pre-election year.
But today the prices of most kharif crops -- soybean, tur, urad, moong are running at less than the MSP. This will definitely be a concern for the government and the issue gets magnified as the government does not have a procurement scheme for crops other than rice and wheat. Also sugar has created other problems for the mills which are having large arrears with farmers. Therefore, the paradox with low food inflation is that while consumers gain by paying lower increase in prices (a decrease for some products), the other constituency is worse-off.
The other concern which will definitely be the focus for the RBI is core inflation which is now above 6 percent. In fact if food items, which have a weight of just about 46 percent are excluded, then all other broad groups have fairly high inflation numbers. House rentals are up by 6.6 percent, household products by 6.1 percent, transport by 7.7 percent, personal care by 5.2 percent, fuel and light 8.6 percent, health 7.7 percent. And more importantly, these rates have been high for successive months leading to the core inflation number of 6 percent. This is a concern not because it is high but also that it has become quite sticky. While it is expected that there will be a nudge from the government once again to the RBI to lower interest rates, this aspect of CPI inflation will turn the scales to a status quo.
Industrial production at 4.5 percent is quite steady given that the low base effect which had helped to prop the number in June and July has gotten diluted and hence the Goods and Services Tax (GST) effect now is done with. While overall growth of 5.1 percent for the first half is just about satisfactory, it does look like that this range of growth can be maintained for the year. There are two factors that will have to play out.
First are consumer durable goods. This sector has strong backward linkages with the rest of industry. Growth at 5.2 percent is encouraging and given the boom in retail sales in October and November we can expect this momentum to be maintained in the coming months too. This should be supported by higher rural spending to the extent that it materialises though admittedly there would be some moderation as some parts of Maharashtra and Karnataka which have been declared drought regions. Also lower food inflation will mean lower incomes for farmers. Hence rural spending may not be overbearing this time and it has to be more from the urban sector.
The second is infrastructure, which has done well with 9.5 percent growth, with the central government being the main player this time. The focus on housing and roads has led to an increase in demand for cement in particular which is getting reflected here. The question is whether or not this can be sustained? Presently there is a possibility of fiscal slippage as non-tax revenue, GST and disinvestment are the unknowns. Shortfalls in revenue and determination to stick to the fiscal deficit target of 3.3 percent can lead to the puzzle of cuts in capex towards the end of the year. Hence, while there is reason to believe that growth will be steady, expectations cannot run ahead of this reality.
The investment proxy as represented by capital goods present a mixed picture. Non-electrical machinery has been stable at 4.6 percent during the first half though electrical has slipped into negative territory in September though being 4.1 percent for the cumulative period. A major prop here comes from the auto sector (tractors and HCVs), and hence there are no major signs of all-round investment kicking off.
Hence, on the whole, it appears that the economy is on the right track and these indicators will not get derailed. But at the same time, it will be a stable path for inflation and industrial growth and one cannot expect any upsurge in industrial production or significant moderation in prices. But put along with a better rupee and unchanged interest rate scenario, the picture is fair for the economy.
(The writer is Chief Economist, CARE Ratings; and author of Economics of India: How to fool all people for all times)
Updated Date: Nov 13, 2018 13:11 PM