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Food is killing growth in India and China

Food prices are killing growth literally. India's official inflation index, the WPI (Wholesale Price Index) rose by 6.46 percent year on year for the month of September 2013, largely driven by the food index, which has a 14.3 percent weight in the general index, that rose by a whopping 18.4 percent. The non food manufacturing index rose by just 2.1 percent indicating weakness in pricing power amongst manufacturers on the back of weak aggregate demand.

China saw its official inflation index the CPI (Consumer Price Index) rise to a seven month high of 3.1 percent year-on-year, driven by food prices that rose 6.1 percent led by vegetable prices that rose 18.9 percent. China's CPI is below government's threshold rate of 3.5 percent but has risen from levels of around 2 percent over the last few months. However producer price index in China fell year on year for the 19th straight month in August indication weakness in pricing and demand in the economy.

Costly food. Reuters

Costly food. Reuters

China's export data for the month of September showed a surprise fall of 0.3 percent against consensus estimates of 6 percent. China official growth estimates for 2013 is pegged at 7.5 percent and with high food inflation and weak exports the country could see growth levels trend down. China has seen a slight recovery in manufacturing over the last two months from a recessionary trend seen for many months previous to August 2013.

India is seeing weakness in growth with IIP (Index of Industrial Production) growth at just 0.1 percent for the April-August 2013-14 period. Automobile sales data show that passenger cars and commercial vehicle sales are down 4.7 percent and 15.3 percent in the April-September 2013 period reflecting weak consumer and commercial demand in the economy. Tax collection growth is at 10.66 percent in the April- September 2013 period against budgeted levels of 17.5 percent for the full fiscal year. Corporate tax growth is at 8 percent levels indication low corporate sector profitability.

IMF has pegged India's fiscal 2013-14 GDP growth at 3.8 percent levels while the government and the RBI are placing growth at 5 percent and above levels. India's GDP growth for 2012-13 was at decade low rates of 5% and first quarter 2013-14 GDP growth was at 4.4 percent and the economy will have to grow at average of around 5.3 percent for the next three quarters to achieve full year growth rates of over 5 percent.

RBI is constrained on growth driven monetary policy on two counts. One is food inflation that is keeping up overall inflation expectations and the other is the Indian Rupee (INR) that is vulnerable to inflation, growth and global monetary policies. RBI raised the benchmark policy rate the repo rate in its 20 September 2013 policy review and is widely expected to raise the policy rate in its 29 October policy review. However even while raising the repo rate, the central bank is trying to address tight liquidity conditions in the system that is borrowing over Rs 100,000 crores from the RBI to fund everyday liquidity requirements. RBI has reversed a part of its INR stability policies by bringing down the MSF rate by 125bps since 20th September but the central bank is still wary of further fall in the currency on risk aversion sell off by markets.

The government is fiscally constrained to push growth. Lower than budgeted tax collections is forcing the government to bring down its plan expenditure to keep the fiscal deficit at budgeted levels of 4.8 percent of GDP. Higher than budgeted fiscal deficit is INR negative and the government does not want the currency to weaken to below record low levels of Rs 68.80 that it saw in August 2013.

Arjun Parthasarathy is the editor of a website for investors.

Updated Date: Dec 21, 2014 00:45 AM

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