On balance, interpretation of the latest economic data points to a recovery, albeit a muted one. The Reserve Bank of India’ s >unexpected rate cut on Thursday last — just two weeks before a scheduled policy review — is the most ringing endorsement of the recovery till date.
With the budget barely a month away, the state of the economy obviously is a key factor. Finance Minister Arun Jaitley claimed that the economy is stable in a macroeconomic sense and that economic fundamentals are improving. The World Bank chief, on a visit to India, said that the Indian economy would clock more than six per cent growth next year. The IMF and the OECD are also sanguine about India’s prospects in 2015. Within the BRICS group of nations, China’s economy is cooling down while Brazil and Russia are over dependent on commodity prices. The sensational fall in petroleum prices has caught major oil producers such as Russia unawares. Falling oil prices have dragged down other commodity prices. With all major economies, except the U.S. and to some extent the U.K., slowing down, India is expected to be an outlier.
Within India, official forecasts place economic growth at around 5.5 per cent during the current year — by no means a spectacular figure but significant because it suggests a break-out from the sub-5 per cent growth rate of the past two years. There is no doubt at all that the sentiment is improving. But do the available economic numbers justify the optimism?
Monthly data Among the data, which every one scrutinises, are the two monthly economic indicators — the Index of Industrial Production (IIP) and the inflation numbers. Industrial output figures for November and retail inflation data for December were released on January 12. WPI inflation numbers came two days later.
Industrial output, as measured by the IIP, was up 3.8 per cent in November. Retail inflation, as measured by the Consumer Price Index (CPI), rose to 5 per cent in December, inching up from 4.38 per cent recorded in November. Inflation, as measured by the Wholesale Price Index, rose marginally to 0.1 per cent in December from zero per cent in November.
These data need to be placed in their proper context. The rise in industrial output in November is by itself not particularly noteworthy. However, it had contracted by 4.2 per cent in October, with the manufacturing sub-sector, accounting for a high 75 per cent of the IIP, contracting by an alarming 7.6 per cent.
Manufacturing has recovered somewhat in November growing by 3 per cent. (the eight-month figure for manufacturing — a growth of 1.1 per cent — is better but not by much than the minus 0.4 per cent in the April -November period of last year).
In the context of the slowdown, a 3.8 per cent jump is seen to be impressive, representing as it does a five-month high. The index was down by 1.3 per cent in November, 2013. In the first eight months of the current financial year, the IIP was up by 2.2 per cent, as against 0.1 per cent during the corresponding period in the previous financial year. Without the lift provided by the November data, the output figures would have remained bleak. The next and more important issue is whether the improvement will be sustained. A look at individual sub-sectors constituting the IIP will help. Manufacturing will remain in focus not just because of its large weight in the index, but also because many of the policy initiatives aimed at reviving the economy target this sub-sector. The clamour for an interest rate cut at the next RBI credit policy review (in early February) is based on the assumption that lower interest rates are necessary for industrial revival. Mining and electricity sub-sectors grew by 3.4 per cent and 10 per cent, respectively. Quite clearly these two are benefiting from the policy initiatives although much more needs to be done.
While there was growth in production of basic goods (7 per cent), capital goods (6.5 per cent) and intermediate goods (4.3 per cent), the output of consumer goods shrank by 2.2 per cent mainly because of a sharp contraction in consumer durables (14.5 per cent). Apparently, even festival sales during the Diwali season have not boosted the output of consumer durables. Given the seasonal nature of sales, a recovery in this segment appears to be far off. On the positive side, the economy has been growing consistently even if the rate of growth has not been particularly strong. Consistency reinforces the conviction that the upturn is for real. Altogether, the IIP data and the inflation numbers have given rise to optimism.
RBI’s unexpected move Attention inevitably turned to the RBI. Will there be a rate cut signal soon? The RBI has been sticking to an 8 per cent repo rate despite strong pressures from industry and the government. The central bank had made it clear that a further cut was possible only if it was convinced that inflation stabilised at the current low levels. The government was expected to do its bit to rein in the fiscal deficit.
On Thursday last, when large parts of India were having a festival holiday, the RBI brought down the repo rate by 0.25 percentage point to 7.75 per cent. In recent times, this has been the first important monetary action that has taken place outside the scheduled policy reviews and shows RBI’s faith in the ongoing fiscal measures to rein in deficits.
It is now over to the Finance Minister and the Union budget for more growth enhancing strategies.