The dip in annual industrial output growth to 3.4 per cent in June from 5 per cent in the previous month, is mildly disappointing. This is compounded in that the consumer price index (CPI)-based inflation rose to 7.96 per cent in July after hitting a 29 month low of 7.46 per cent the month before. It is natural that these figures, released on the same day, are interpreted as setbacks — and they are to those who were hoping for firm signs of a recovery and a further easing of inflationary pressures.

But the plain fact is that the numbers are no cause for alarm. The over-anxious reactions are largely a result of being much too optimistic about the economy’s fortunes. Yes, that CPI inflation has clawed back to 8 per cent isn’t great news. But some kind of spike was only to be expected, given the monsoon’s delayed onset, which resulted in a 36 per cent average rainfall deficit from June till mid-July. But there has been a big change since then, with the cumulative deficit narrowing to 18 per cent and the India Meteorology Department forecasting near-normal rains over the next one-and-a-half months. The fact that onion and potato prices haven’t really gone up in the last one month, apart from kharif plantings staging a rebound, provides some comfort on the inflation front. Add the recent softening trend in global crude prices and it is safe to say we are insulated, other things being equal, against a sharp inflationary increase.

The outlook on industrial growth merits a similar cautious optimism. Those overly distressed by the 3.9 per cent average for this quarter should remember that a minus 0.7 per cent year-on-year growth was registered between January and March. Since then, we have been on some kind of recovery path, albeit not a sharp or uniform one. A stable government at the Centre has infused confidence in the markets. The boost in overall sentiment has revived consumer spending (most visible in car and two-wheeler sales) and production in select sectors such as cement. Of course, the big question is how sustainable the recovery is. In the absence of investment activity, even maintaining current growth rates will not be possible. We are yet to see investments happening, which alone can create the jobs and incomes to drive future consumption and growth. This is where the Centre has a huge part to play. While the new government has not even completed three months in office, there is no time to be lost in taking key reform initiatives such as introducing a Goods and Services Tax, repealing provisions in the recent Land Acquisition Act that make it difficult to set up greenfield industries, and chalking out a time-bound plan for phasing out non-merit subsidies. Corporates will be emboldened to invest only when they are convinced of the government’s appetite for bold reform.

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