It is fairly common nowadays to receive unflattering reports on the economy. After all, the slowdown in the economy is all too evident. Periodic reports, both official and unofficial, have recently tended to focus on the negative aspects. However, receiving three sets of worrisome economic data on the same day is something unusual.

On November 12, the monthly industrial output data, retail inflation for October as well as the trade figures for that month were released.

All of them reveal facets of the slowdown, and the challenges policy-makers face at this juncture.

Foreign Trade

To take the trade figures first, during October, merchandise trade deficit, the excess of imports over exports, was $21 billion, a record for any individual month. For the April to October 2012 period, cumulative trade deficit has gone up to $110 billion. At this rate, barring any major change in the trends of exports and imports, it could easily touch $200 billion, even higher than the $185 billion last year. India has generally imported more than it exported. Trade deficit on merchandise account is the rule. But apart from its sheer size what makes its present level menacing are the following:

Oil and gold imports account for a substantial part of the import bill, and their share has been rising. These are not unusual. Petroleum imports are inelastic, not susceptible to changes in price.

Gold imports, which surged ahead of the festival season, might possibly moderate but the long-term solution to reduce its imports is to condition domestic demand for it.

Encouraging financial savings in the place of buying gold or the jewellery is one possible solution but for a long time to come, the fascination for physical gold among households will not cease.

What matters equally are non-oil imports, which have, over April-October, declined by 82 per cent even while oil imports are up. Imports of capital goods, intermediate products and other items needed for investment in India have declined along with other non-oil imports. This is interpreted to be a sure sign of the slowdown.

Indian exports have been affected by the continuing economic woes of the U.S. and the European Union, which remain the two principal markets.

Under the current foreign trade policy regime, India has sought to diversify its trade to non-traditional markets and to products, but with world trade itself contracting, such strategies might pay-off only when more normal conditions return.

Another interesting feature has been the impact of rupee movements on India’s trade volumes.

Normally, a weaker rupee should give a fillip to exports but this time rupee depreciation does not appear to have benefited. Reasons for this are worth examining in detail but one plausible explanation might be that amidst all the volatility in the dollar-rupee exchange rate, it was not possible to manage a hedging strategy.


On inflation, there were two reports, both relating to October, the one on retail inflation at the beginning of the week and the other the monthly WPI (wholesale price index) inflation in the course of the week.

Retail inflation, based on a new, broad-based consumer index, rose to 9.75 per cent, on the back of a sharp increase in prices of sugar, pulses, vegetable oils and edible oils.

While this seemed to vindicate the Reserve Bank of India’s (RBI) stand in not signalling a softer interest rate policy, the news on WPI inflation which came a few days later was more positive for those clamouring for lower interest rates.

WPI inflation declined sharply to 7.45 per cent in October from 7.8 per cent in August. Especially noteworthy has been the fact that slow demand-side pressures have caused non-food manufactured inflation (core inflation) to decline to 5.2 per cent from a peak of 5.8 per cent in August.

WPI inflation has been the benchmark the RBI has been relying upon, even though it has admitted that it is not the most suitable one. Recently, there have been criticisms that the RBI has not been consistent, relying on core inflation, at times, the WPI inflation on other occasions and now the CPI inflation to justify its interest rate stance.

Rating agency Crisil thinks that food prices will go up in the near-term and that would reflect in the WPI numbers.

Industrial output

The third set of data released on Monday, the IIP (index of industrial production) figures for September showed a contraction in industrial output of 0.40 per cent. Industrial growth during the first-half of the year (April-September) has been at a mere 0.1 per cent as against 5.1 per cent during the same period last year (2011-12).

In August 2012, the IIP was up by 2.5 per cent over last year, the only month in the July-September quarter, in which it was positive. At that time, some official spokespersons claimed that the worst was over for the economy. Clearly, such claims are premature.

If anything, the declines in capital goods and consumer durables do not encourage optimism.

If anything, the lower IIP might suggest a sharp decline in the GDP (gross domestic product) figures for the second quarter, probably even less than 5 per cent.