With the blistering heat on, the Indian Met has given another forecast for a normal monsoon at 98% of the LPA, with the usual 5% error on either side. Already pre-monsoon showers are far below normal; any less than normal or delayed monsoon can cause havoc with the crops, especially in the south and west where parts are going through the worst drought in four decades. While the agri front does not look too good, on manufacturing and industry numbers continue to be bleak. Not only are IIP numbers low, the Markit PMI for April has the lowest index since November 2011. The RBI credit data also does not show any pick up in credit for all sectors. Auto sales for the past year posted the first decline in a decade and the numbers for April also show lower sales compared to last year. Can the economy turn around any soon or are we looking at a very slow revival, if at all?
The government seems to be going with a 6%+ growth for this year. The RBI has estimated it lower, at 5.7% which is in line with the range given by us earlier. For those who are looking to the RBI for significant rate cuts to boost the economy, the central bank is not ready to oblige. In fact, with the elections coming up the RBI seems to have stayed assertive. While a small 25bps cut in the May 2rd policy review indicated slight accommodation, it has been made quite clear that central bank can only do so much. Quite certainly the RBI is not convinced with the government’s intent on fiscal consolidation, reviving investments and removing supply side bottlenecks.. Governance to stimulate investment has been listed as a critical factor for revival in growth and rate cuts ahead therefore appear to be reined in.
While the RBI has put the onus of growth squarely back on the government, the view continues to be wary even on the inflation front. Though the WPI has been heading downwards, with manufacturing products inflation now in the comfort zone, the RBI continues to flag pressures on consumer prices, especially food. These pressures also show up in the Indicus Price Monitor that keeps track of mandi prices in the real time, after some decline in the first quarter of 2013, inflation in this index has stayed around 13-14%. Of course, households across the country know all about these pressures. To take up one simple example: despite huge wheat stocks, the all-India average retail price of wheat crossed Rs. 20 per kg in March and April, compared to Rs. 16.3 levels last year.
What the government can take comfort from, which is not of its doing, is the fall in gold and crude prices globally, that have taken some of the edge of our current pressures on inflation and current account deficit. But markets are fickle, and such trends can reverse quite easily, and we have to be prepared for that. Which is why the RBI will not be too accommodating this year. Where does that leave us then?
We could hope for some new disruptive force to shake the economy, the only possibility right now seems to be in the political front. Till then India will plod on in the 5.5-6% growth trough for this year and inflation in the 6-7% range, as mentioned in earlier estimates, nothing has changed.
P.S. Indicus has been tracking real time prices for 62 commodities over the past year and the indices are now available on our website.