The Reserve Bank of India (RBI) is in an unenviable position ahead of its monetary policy review meeting scheduled on 16 September. It has to take a call on interest rates -- whether to raise them further in the face of continuing inflationary pressures or pause temporarily based on the latest disappointing factory output data. To its credit, the central bank has been much more realistic in turning the spotlight on the Indian economy's blind-spots than North Block. In its successive policy reviews, the RBI has not simply focused on inflation's stubborn persistence, but even warned of business mood dips impacting investment and consumption growth declining as interest rate-sensitive sectors face increasingly reluctant buyers.
GDP Growth
In fact, while New Delhi has tended to exhibit a misplaced optimism about growth prospects with its eyes shut, the RBI was ahead in scaling down its Gross Domestic Product (GDP) growth forecast for 2011-12 by a full percentage point to below eight per cent.
India’s GDP increased 7.8 per cent in the three months ended March 31 from a year earlier, the weakest pace in five quarters, government data show. Still, the expansion is the quickest after China among major economies, bolstered by higher incomes in the nation of 1.2 billion people. All in all, the portents for the Indian economy are far from encouraging.
Overall IIP
The latest industrial growth figures for July suggest that the slowdown that many experts and most policymakers thought would be temporary and narrow is, indeed, broad-based. The overall Index of Industrial Production (IIP) registered a year-on-year expansion of only 3.3 per cent, the lowest in 21 months. Manufacturing and mining grew by 2.3 per cent and 2.8 per cent respectively, while the 13.1 per cent increase in electricity was mainly a result of the good monsoon, which has helped boost generation from hydel stations. More disturbing has been the 15.2 per cent dip in production of capital goods, a proxy for investment activity. Even if one discounts for the unreliability of data for this sector -- leading to extreme growth volatility -- the fact that investment sentiment has been vitiated by recent political developments and concerns over ambiguous laws and tangled procedures among foreign investors cannot be missed. If industrial growth is slowing, there is the possibility of weakening demand on account of high interest rates further dampening it.
Growth in Mining Output
The growth in mining production was 2.8 per cent in the month, down from 8.7 per cent in the same month last year. Production of intermediate goods fell by 1.1 per cent during the month under review against a growth of 8.5 per cent in July 2010.
Consumer durables grew by 8.6 per cent in July as compared to a growth of 14.8 per cent in the corresponding month of last year. However, electricity production improved witnessing a growth of 13.1 per cent in July this year as against a growth of 3.7 per cent in July 2010.
Non-durable consumer goods (FMCG) production also grew by4.1 per cent in July, compared to a decline of 0.9 per cent in the same month last year.
Rate of Inflation
Persistent increases in its key policy rates over the past 20 months may have somewhat dented non-food 'core' inflation resulting from excessive demand. But the problem is that while demand in the manufacturing segment may have dipped, general inflation has not. Agricultural production has been tardy for quite a long time now. The services sector has been a saving grace but it cannot prop up growth beyond a point.
The international business environment continues to be bad and in fact deteriorating and with the RBI raising lending rates and tightening liquidity so as to check rampant inflation, the negative impact on economic activity and growth was not inconceivable. For once the Finance Ministry may be right when its Chief Economic Adviser Prof Kaushik Basu, says inflation will stay high until December. So the RBI, in a way a victim of its own success, will now have to battle high inflation and the prospect of falling output driven by weakening demand.
For policymakers it would be tempting to pass off the slowdown as partly the outcome of global woes just as earlier they claimed that inflation was also stoked by global commodity prices. But unlike the United States and the European Union, India did recover from 2008 with a smart pick-up in 2009. The current slide actually began in the past six months or so. And that has been the result of very successful monetary and very slothful public policies.
GDP Growth
In fact, while New Delhi has tended to exhibit a misplaced optimism about growth prospects with its eyes shut, the RBI was ahead in scaling down its Gross Domestic Product (GDP) growth forecast for 2011-12 by a full percentage point to below eight per cent.
India’s GDP increased 7.8 per cent in the three months ended March 31 from a year earlier, the weakest pace in five quarters, government data show. Still, the expansion is the quickest after China among major economies, bolstered by higher incomes in the nation of 1.2 billion people. All in all, the portents for the Indian economy are far from encouraging.
Overall IIP
The latest industrial growth figures for July suggest that the slowdown that many experts and most policymakers thought would be temporary and narrow is, indeed, broad-based. The overall Index of Industrial Production (IIP) registered a year-on-year expansion of only 3.3 per cent, the lowest in 21 months. Manufacturing and mining grew by 2.3 per cent and 2.8 per cent respectively, while the 13.1 per cent increase in electricity was mainly a result of the good monsoon, which has helped boost generation from hydel stations. More disturbing has been the 15.2 per cent dip in production of capital goods, a proxy for investment activity. Even if one discounts for the unreliability of data for this sector -- leading to extreme growth volatility -- the fact that investment sentiment has been vitiated by recent political developments and concerns over ambiguous laws and tangled procedures among foreign investors cannot be missed. If industrial growth is slowing, there is the possibility of weakening demand on account of high interest rates further dampening it.
Growth in Mining Output
The growth in mining production was 2.8 per cent in the month, down from 8.7 per cent in the same month last year. Production of intermediate goods fell by 1.1 per cent during the month under review against a growth of 8.5 per cent in July 2010.
Consumer durables grew by 8.6 per cent in July as compared to a growth of 14.8 per cent in the corresponding month of last year. However, electricity production improved witnessing a growth of 13.1 per cent in July this year as against a growth of 3.7 per cent in July 2010.
Non-durable consumer goods (FMCG) production also grew by4.1 per cent in July, compared to a decline of 0.9 per cent in the same month last year.
Rate of Inflation
Persistent increases in its key policy rates over the past 20 months may have somewhat dented non-food 'core' inflation resulting from excessive demand. But the problem is that while demand in the manufacturing segment may have dipped, general inflation has not. Agricultural production has been tardy for quite a long time now. The services sector has been a saving grace but it cannot prop up growth beyond a point.
The international business environment continues to be bad and in fact deteriorating and with the RBI raising lending rates and tightening liquidity so as to check rampant inflation, the negative impact on economic activity and growth was not inconceivable. For once the Finance Ministry may be right when its Chief Economic Adviser Prof Kaushik Basu, says inflation will stay high until December. So the RBI, in a way a victim of its own success, will now have to battle high inflation and the prospect of falling output driven by weakening demand.
For policymakers it would be tempting to pass off the slowdown as partly the outcome of global woes just as earlier they claimed that inflation was also stoked by global commodity prices. But unlike the United States and the European Union, India did recover from 2008 with a smart pick-up in 2009. The current slide actually began in the past six months or so. And that has been the result of very successful monetary and very slothful public policies.
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