Reality check on the economy

Economic issues are inextricably tied to the ongoing high voltage election propaganda. The claim that a BJP-led NDA government will manage the economy far better than the UPA II will have to be tested.

But for now, do official data on the economy corroborate popular feelings? Take the single important issue of price rise.

Economists discuss price rise in terms of inflation and inflation expectations but for the common man it is the burden of price rise and his understanding of what the future price situation would be. Inflation expectation are said to be hardened if a majority of consumers do not think prices of say essential commodities would come down.

Common man’s problems

Even more difficult it is for the common man to relate to the debates over GDP (gross domestic product) such as whether India’s growth is on track. For most people, economic growth is to be seen in the context of issues such as employment generation and not as some abstract statistical figure.

On the eve of a new government formation, the ruling coalition has a “lame duck status” — under the model code it cannot announce any new policy measures to uplift the sentiment. Also, until the announcement of election results on May 16, there are very few routine data releases — the monthly inflation numbers, both WPI (wholesale price index) and CPI (consumer price index), the index of industrial production (IIP) data the monthly and annual trade figures of the Ministry of Commerce and Industry.

The CSO’s (Central Statistics Office) estimates of GDP growth for the whole year (2013-14) will not be released until the beginning of June. Nor will the next monetary policy review of the RBI be made before the election results are out. (The scheduled review will be on June 3). So what do these seasonal data releases of the past few weeks indicate?

Deceleration in exports

To take up trade figures first, the March data released by the Ministry of Commerce and Industry show a deceleration in exports by 3.15 per cent, the second consecutive monthly fall. For the whole year (2013-14), exports were $312.35 billion, short of the target of $325 billion. Imports fell by a little over 8 per cent to nearly $451 billion. The trade deficit (imports minus exports) was at a three-year low at a little over $138.59 billion.

A few points about the trade data: (1) Narrowing of the trade deficit is not by itself a welcome development. That depends on how the contraction has occurred. Ideally, it should be on the basis of an export revival and not just import contraction. Gold and silver imports have declined sharply due to stringent government restrictions. Oil imports were higher. A reduction in non-oil imports is not always welcome news. On the contrary, it indicates economic slowdown.

(2) Exports declining for the second month in a row are a worrisome development. Until two months ago, there was a revival of sorts, aided in part by a depreciating rupee and economic recovery in the U.S. The rupee has shown signs of appreciating recently. Currencies of some competing countries have been depreciating alongside this. India’s weak manufacturing growth is another factor as also uncertainty at the global level.

The government that takes office in May will have plenty to do to boost exports. However, ultimately, for both imports and exports it is a broad economic revival that will be the solution.

Disappointing lead indicator

The Index of Industrial Production (IIP) data is often considered to be a lead indicator of macro-economic growth. Often criticised for its volatility and sometimes for its unreliability, the IIP is still the most widely watched index for industrial activity. For February, it declined by 1.9 per cent against a rise of 0.8 per cent in the previous month. Manufacturing, forming 75 per cent of the index, declined by 3.7 per cent. Mining has recovered somewhat while electricity posted a robust growth. Consumer durables segment continued to slide. For the 11 months till February, industrial output fell by 0.1 per cent compared with 0.6 per cent growth last year.

This is as convincing an indication as is available of the slowdown. It is here, of course, that the accent of the new government will have to be on reviving investment.

The sluggish growth in industrial output has not dampened inflation. Both WPI and CPI inflation data for March released on Tuesday (April 15) show an uptick over the previous month. WPI rose to 5.7 per cent. It was at a nine-month low of 4.68 per cent in February. CPI inflation was also higher than expected at 8.31 per cent up from 8.03 per cent in February. Higher food inflation — costlier vegetables, fruits milk and milk products — are behind the rise in both the indices. Amid weak growth, the RBI would find it difficult to hold back rates.

It will be a gross understatement to say that the new government will face daunting challenges.

narasimhan.crl@thehindu.co.in