The numbers for consumer price inflation and factory output, on the face of it, tell a straightforward tale: growth is the bigger problem and inflation is on the wane. Only, one needs to delve a bit deeper. The CPI index has been trending downward since the average level of 10.4 per cent for the third quarter of 2013-14. The pace of decline has picked up after the first quarter of this year. It stands at just 5.5 per cent for October, against 7.8 per cent in August. Given the high levels of Q3 retail inflation last year, the steep decline may sustain itself till December. Therefore, there is some merit in the Reserve Bank of India’s argument that the ‘base effect’ is perhaps overstating the drop in inflation. This is particularly true in the case of consumer food prices (up 5.6 per cent in October), which soared to about 15 per cent in the same period last year. A reliable picture on whether inflation has been controlled will emerge in the first quarter of 2015, when the base effect is less pronounced. Meanwhile, there are straws in the wind that cannot be ignored. A 12 per cent deficient monsoon is expected to hit kharif output. There are signs of an upturn in food prices. Overall inflation risks also arise from the appreciation of the dollar, owing to a US recovery and the withdrawal of quantitative easing. This could lead to higher import costs, negating the fall in fuel prices. Therefore, the RBI may be content to watch bond sales pick up (and yields fall) on falling inflation numbers, rather than give a strong growth signal that may raise fears (even if unfounded) of the return of inflation and capital outflows.

But there is an equally convincing story to be told on the other side. Signs of a recovery in industrial output are feeble. A growth rate of 2.8 per cent in the first half of this year is no cause for cheer if one considers the low base of less than 1 per cent growth in the first half of 2013-14. Industrial growth has been sluggish since June 2011, save a brief spurt between August and October 2012. It has been negligible or negative after December 2012. This slump coincides with a period of high fuel, food prices and the transmission effect of high interest rates — a triple whammy.

The question is whether the RBI is keeping too tight a leash at a time when an investment revival is the need of the hour. Food inflation is poorly correlated to interest rate movements; it is industry that is impacted, leading to a drop in aggregate demand. The RBI must step in to lower rates when it is convinced that the threat of inflation has receded. A coordinated fiscal-monetary response by the RBI and the Centre is called for to deal with growth-inflation challenges.

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