A set of mostly indifferent macro-economic data just two weeks before the presentation of the Union Budget can puncture what little optimism there is, and make the budget exercise even more challenging. On February 12, the Central Statistics Office (CSO) released the industrial output data (IIP), which, for December, contracted by 0.6 per cent. Simultaneously, inflation data based on the new consumer price index (more commonly referred to as retail inflation) was released. CPI inflation rose to 10.79 per cent in January from 10.56 per cent in the previous month. Both these are significant by themselves: obviously, they reinforce the perception of a steep slowdown accompanied by persistently high inflation. Policy making already difficult, has to reckon with a further worsening of sentiment.
The bad news did not begin with last Tuesday’s industrial output and inflation data. Many would say that even the last Reserve Bank of India’s (RBI’s) monetary policy statement was not encouraging, even though it cut repo and CRR rates by 0.25 percentage points each. The RBI talked of heightened risks to growth and inflation and did not commit itself to rate cuts over the near-term.
On Thursday, WPI inflation for January came in at an unexpectedly low 6.62 per cent, down from 7.2 per cent in the previous month. This should normally be considered positive. The fall has been steep, and at this rate well on course to go even below the RBI’s March inflation target of 6.8 per cent. Core inflation has remained low. However, the wedge between WPI and CPI inflation continues. The latter plays a significant role in conditioning expectations.
The other important macro-economic news was the CSO’s advance estimate of gross domestic product (GDP) growth for the current year (2012-13) pegging it at a ten-year low of 5 per cent. Since growth during the first-half of the year has been estimated at 5.4 per cent, the implication is that during the second-half it will be below 5 per cent.
The government, of course, was quick to cast doubts on the veracity of the CSO data, not the arithmetical accuracy per se, but the methodology. Advance estimates are based on actual data for the first eight months or so. The whole year’s estimate is arrived at through an extrapolation. As the chief statistician explained, the methodology will be valid if there is a linear growth. There should not be any sharp deviation from the trend over a large part of the year. The government’s view is that economic activity since November last has been on the upswing. Actual calculations will show economic growth during the second-half at a much higher level than the sub-5 per cent growth implied by the CSO’s advance estimate. The whole year’s growth rate will be at least 5.5 per cent.
An important inference from the above would be that the economy is not doing all that badly even if it is not looking up significantly. Government spokespersons have pointed out that such upward revisions have been made on many occasions in the past. But it is a moot point whether such optimism holds good now.
The industrial output data has been faulted in the past, for being inaccurate, inconsistent and subject to frequent revisions, and the government would normally have discounted it on similar grounds. Yet, coming in conjunction with other data it cannot be ignored this time. It is also more generalised. A revival in manufacturing during the latter part of this fiscal, it was hoped, would push up the GDP growth rate. But the latest IIP figures have put paid to such hopes.
Finally, a record $20 billion trade deficit, mainly on account of higher petroleum imports, overshadowed the turnaround in exports after a gap of eight months. For the Finance Minister and other policy-makers, by far the biggest macro-economic concerns are the twin deficits — the current account (CAD) and the fiscal deficits. The CAD is expected to reach record levels by the end of this year. The Finance Minister has promised to keep the fiscal deficit within 5.3 per cent of GDP. On the eve of the budget, he could do with better economic news.