Growth concerns remain

Are we going overboard about economic recovery and the end of inflation? The latest consumer inflation and industrial output numbers suggest that the economy is not wholly free of the ghosts of the recent past. All-India food prices rose by 6.8 per cent in February 2015, and by 7.5 per cent in urban areas, a level that cannot be described as comfortable, coming as it does on a high base of 7.9 per cent food inflation last February. As the base effect wears out in the coming months, inflation above 6 per cent should be a cause for concern. However, inflation may remain subdued through 2015-16, provided world commodity prices remain stable and the monsoon is normal. While a course correction can always be worked out later, as of now growth is the chief concern. The new set of GDP numbers along with the IMF’s latest outlook on India tells a revival story, but the foundations of the recovery appear weak. The factory output numbers, despite the inadequate data base that the new GDP series has sought to address, cannot be dismissed altogether. They point to a growth of just 2.5 per cent in April-January, which is at odds with the manufacturing growth figure of 6.8 per cent for 2014-15 put out by the new GDP series. Wholesale price inflation figures point to a still-sluggish trend in industry: it is worth exploring whether negligible WPI inflation is only a result of benign commodity prices, as poor industrial demand could be playing a role. The Reserve Bank of India should look at the WPI for growth-related pointers.

To know how the economy is faring in the short term, policymakers must fall back on inputs from industry and generate employment data on a more regular basis — perhaps twice a year rather than the once every five as the National Sample Survey Organisation now does. Despite the laudable efforts to update the database in keeping with structural shifts in the economy, there is an element of ‘noise’ at work. The RBI and the finance ministry, which have expressed their “bewilderment” over the IIP data from time to time, should consider transiting to a more reliable monthly, or at any rate quarterly data set that, like the latest GDP series, draws from the performance of a wider cross-section of companies.

Yet, there can be no denying that growth impulses can do with a push. The fall in imports in 2014-15 can be explained by the over 50 per cent fall in oil prices since June; but if this continues alongside benign oil prices it should be taken seriously. While watching inflation, the RBI should keep in mind the disconnect between food prices and interest rates. A rate cut in April will serve the economy well. It may also help control a likely surge of foreign inflows in the wake of monetary easing in the EU. Along with a reforms push from New Delhi, a nudge from Mint Street can make all the difference.

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