Coming to the third week of June, we have the usual monthly data releases relating to inflation and industrial output. The latter, measured by the index of industrial production (IIP), relates to the month of April. It shows industrial production growing by 4.1 per cent on a year-on -year basis. The impressive performance was propelled by a 5.1 per cent growth in manufacturing, which accounts for almost 75 per cent of the IIP index. The consumer price index, which measures retail inflation (CPI inflation), is for May. The year-on-year rate rose from 4.87 per cent in April to 5.01 in May.
A few days later, the Commerce Ministry released the trade figures, also for May. Merchandise exports fell for the sixth straight month. In May alone, the decline was by over 20 per cent, following falls of 14 per cent in April and 21 per cent in March.
Is there is a common thread running through these as well the wholesale price index (WPI) for which data was released separately? The WPI remains relevant for policy even though the RBI has shifted to the CPI for monetary policy purposes. In the limited context of growth-inflation dynamics, it is the CPI that is relied upon.
What do these data say for an economy widely perceived to be on a revival mode? What messages can be discerned in the ever-present dilemma that policy-makers face while reconciling the twin objectives of growth versus price stability?
To take the second issue first, do these data vindicate the RBI’s policy stance of a 25 basis points cut in the in the recent policy statement, which, however, did not satisfy many constituencies? The tone of the monetary policy statement was seen to be hawkish, ruling out further rate cuts in the months to come.
The RBI has been concerned over food inflation — an apprehension wholly justified in the context of the unseasonal rains which disrupted the rabi crop. Yet, the official figures show that food inflation has actually come down in May from its April levels. The only food category which has seen a steep rise has been pulses which rose by a steep 16.6 per cent
Swift actionThe government has been quick to reorient its food procurement policy. The minimum support price (MSP) for pulses have been raised substantially. In a major departure from the past, the government has announced only a modest increase in the price of staples. This is a sure signal to farmers to diversify the cropping pattern away from rice and wheat into pulses. Whether that would pay off in the near-term is a moot point. There are reportedly supply shortages of widely consumed pulses and even global supplies of some of these cannot be taken for granted. But the important message is that the government has drawn the right lesson from the inflation data and is acting proactively to douse price pressures.
If food inflation is not going to be a threat, at least immediately, should RBI worry about capacity constraints in industry leading to price pressures in the face of an even modest increase in demand? Turning to the April IIP index, the signals are mixed. Increase in manufacturing was propelled by the capital goods sector, which grew by 11.1 per cent in April, much higher than its growth during the entire 2014-15. Both industrial production and manufacturing have fared better in April, even compared to the whole of last year. But the progress has been uneven across sectors. The positive inference is that the economy is showing signs of revival but there are still lots of ground to be covered before a full-fledged recovery.
Turning to the merchandise trade data, it is wrong to see merit in the narrowing trade deficit caused not only by falling exports but also imports. Falling imports connote much more than the fall in global oil prices and of gold — the two major items in India’s imports. In fact, India’s major import items figure prominently in India’s exports. Exports of refined petroleum products and of gems and jewellery are significant items in India’s export trade. Besides, a deceleration in imports as much as declining exports suggest an economy beset by low domestic demand compounded but the well-known weakness is external demand.
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