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|The Emperor’s Magical Clothes|
|Thursday, 07 June 2012 03:22|
Inaction and mothballed policies are holding growth and inflation on the wrong sides of the 7% mark.
Source: Economic Times
The summer has been harsh so far, and there is worse to come. With every month, the official numbers look worse than before and the official responses look even more pathetic. One of the biggest farces played out last month was the petrol price hike, now partially rolled back, all in the name of deregulated pricing. Yes, crude price hikes necessitated higher petrol prices since January, but even with the dramatic fall in the rupee, crude oil is cheaper today than it was in March. The entire episode has left little faith in this government to act responsibly.
Growth for the January-March quarter was lower than expected, with the index of industrial production (IIP) dragging manufacturing down to levels last seen in 1991-92. While credibility in the IIP is another issue altogether, the fact is that manufacturing has been slowing down for a few quarters. This quarter’s numbers are not likely to shine either: truck rentals for cargo have dipped in April and May, reflecting a more than 10% decline in dispatches from industry. However, the national manufacturing policy put forth last October is another old-style solution, with the government micromanaging industrial zones. In India, the two fundamental factors of production, land and labour, are mired in red tape; as we pointed out last year, insulated liberalised zones are not a sustainable solution and will work just to create more lopsided growth. Policies that belong to the last century will not work in today’s world, but this government refuses to step into 2012.
The problems have been pointed out clearly by one and all and are staring at us in the face now: lower growth and stubborn inflation, all tied up with a fiscal deficit and current account deficit that stave off all hope of a revival in the rupee.
It is not just the rate hikes that have brought things to this pass, but cutting rates would go a long way in cushioning the shock to industry. The RBI should go back to its earlier policy when rates had been kept in check, recognising that the primary drivers for inflation were in the primary products. Consumer price inflation has been in double digits since 2009, a brief dip for four months has now reversed in April back to 10% levels. Our real-time monitoring of mandi prices has shown that the pressures in inflation have far from abated. While so far oilseeds, pulses, fruit and vegetables have been moving sharply upwards, the steam is coming back in cereal prices with inflation in rice and wheat moving back into focus.
With pre-monsoon rainfall deficient across the country, a whimsical monsoon will only add to the pressures in this segment. On the positive side for manufactured products, input prices of some core commodities are set to stay subdued. With the slowdown in China, iron ore prices, for instance, are expected to fall 19%. Net-net, it would be in order for the RBI to lower rates now; keeping rates up will not make any difference to inflationary pressures, growth has to take a priority.
Over the past year, we were optimistic about the strength of the economy, but with regressive policies hammering us back a couple of decades, the outlook has been bleak in the last few months. Amidst the gloom, there are, as usual, some bright spots. For instance, despite the IIP registering a negative growth in March for motor vehicles, Siam production numbers show a 6.83% growth year-on-year in the same month. April numbers show production up at 5.81%, with sales rising by 10%. Cement sales have been buoyant, with a 10-12% growth in May from the country’s two leading cement firms, indicating hope for the construction sector showing better results this quarter.
The HSBC-Markit PMI for May also shows stability in manufacturing activity, as it has over the last few months been at variance with the IIP. While India Inc’s lastquarter results showed a slowing of sales growth, sequential rise in operating profits point to a reversal in the 2011 trend.
There is, of course, nothing like a crisis to get things back on track. Unfortunately, a government in denial, cocooned in a bubble wrap of persecution complex, will take longer to help India out of its below-7%-growth-above-7%-inflation mode.
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