Growth matters more

The latest growth-inflation data is not without positive takeaways. Inflation crept up to 5 per cent in May, against 4.87 per cent in April, but the good news is that it is not food-driven, despite the unseasonal rain earlier this calendar year. A combination of an increase in global fuel prices and a falling rupee contributed to a slight rise in the consumer price index. The Centre should roll back at the earliest its excise duty hikes on petrol and diesel in view of a firming of fuel prices. This would leave the Reserve Bank of India with more scope to cut interest rates and push investment. A factory output growth of 4.1 per cent in April, against 2.5 per cent in March, affirms a steady uptrend since Q3 of 2014-15, but the key is to ensure that the revival takes root. Despite a growth projection of about 7.5 per cent for this year, growth remains a bigger concern than prices. As for the prospect of a poor monsoon bringing back food inflation, this is best handled by supply-side management rather than demand control — a point rightly stressed by the RBI in its June 2 monetary policy statement. The only serious threat to inflation comes from an exit of portfolio investors due to external shocks, such as a rate hike by the Fed, turmoil over Greece, and geo-political instability. Investors are rebalancing their portfolios so that such shocks become easier to take. Therefore, as against a $41 billion increase in net portfolio inflows in 2014-15, the first quarter of this fiscal has seen a net portfolio outflow, leading to a mild exchange rate tremor. Our foreign exchange reserves can deal with such situations. Therefore, the economy is on track to hit the January 2016 inflation target of 6 per cent.

The issue now is to nurture growth in a fickle environment. An 11 per cent growth in capital goods output in April points to a steady revival since the third quarter of 2014-15, but this needs to sustain itself to reverse a five-year trend of declining investment as a percentage of GDP. The RBI’s June 2 statement points to “slack” in the economy, manifested in idle capacities. Further damage to crop prospects in the monsoon could pull down rural demand, impacting the already indifferent sales of tractors and two-wheelers. The sharp contraction in exports in Q4 of 2014-15 affirms that global demand cannot be relied on; as the RBI has said, public spending is the way forward.

With private investors weighed down by debt overhang and banks remaining risk averse, public spending can ‘crowd in’ private investment. A demand push will help industry pay back its debts, setting a virtuous cycle in motion. Banks should identify stressed assets at an early stage so that they can be turned around. Managers must be given the confidence to take decisions without fear of reprisal. Unlike in the case of structural reforms, these issues have escaped policy attention.

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