The latest economic data relating to retail inflation and factory output can give rise to optimism. Consumer price index inflation for May at 8.28 per cent on a year-on-year basis was lower than the 8.59 per cent for the previous month. The index of industrial production (IIP) grew 3.4 per cent in April over the same period last year. In March it had contracted by 0.5 per cent. Also, in April, according to government figures there was a revival in exports. Merchandise trade deficit shrunk as exports grew after declining over the previous three months. All these relate to a period when UPA-II was in power. However, for the NDA government these could be a harbinger of better times. At the very least, the first set of important monthly statistics after the new government was formed can reinforce the robust sentiment reflected in the stock indices and spur the Narendra Modi government’s economic revival plans. Yet, for all their positive connotations, evidence of a growth revival is not robust. The IIP, regarded as an important lead indicator, has often been faulted for being inconsistent and volatile. The drop in retail inflation by itself is not significant enough to influence the Reserve Bank of India to cut rates immediately. Food inflation, which has underpinned both the main inflation indices, has not come down appreciably. Core retail inflation, excluding food and fuel prices, has remained high.
Besides, there are other important risks. The forecast of a less-than-satisfactory monsoon raises the possibility of higher agricultural prices. All of a sudden the geopolitical situation in West Asia has deteriorated sharply. Petroleum prices have shot up in the global markets and this naturally has important ramifications for India. Oil imports will become more expensive. The much-vaunted reduction in the current account deficit to below 2 per cent of GDP as was seen last year (2013-14) will be difficult to achieve now. Higher oil prices can push up other commodity prices. India’s subsidy burden might go up, adding to the fiscal deficit. If, however, the government decides to pass on the burden of high global oil prices to consumers, retail inflation will rise. Turning to factory output data, it is difficult to explain the 16 per cent jump in the capital goods segment in April, the highest such rise in nine months. In March it had contracted by 11.6 per cent. Over three months the trend in capital goods output has been negative. The small uptick in intermediate goods does not really suggest a revival. Bank credit has grown at a lower rate than what an economy on the rebound would require. The upshot of all this is: the usual lead indicators need to be evaluated over time to draw firm conclusions regarding the economy.
