Let us begin with the good news. Economic growth in India continues
to present a happy story. Even if we take the highly volatile IIP, which has
consistently shown lower growth since the peak of 15% growth in the Jan-March
2010 quarter, manufacturing is expected to turn in a 9% growth in 2011-12. The
service sector is expected to grow by close to 11% next year, as trade,
transport, communication, hotels, finance etc. are all set to continue their
robust growth. Apart from all the usual indicators of production and economic
activity, the improvement in the hiring indices across all sectors is a pointer
to firms turning back to their expansion plans. Salary hikes are also on the
way up, not yet to the peaks seen during the boom years, but significantly
higher than the past year.
Now for the bad news. Though all inflation indices show falling
inflation rates, as we, at Indicus, have been saying for the past two years,
inflation is not on its way out. This will not be news to the households who
are grappling with high price spikes in basic food and fuel goods, nor will it
be news to companies who feel the pinch coming in back again through inputs and
commodities, nor will it be news to the RBI whose eagle eye is forever trained
on inflationary pressures ? it will however probably be news to the government,
who has been seemingly unaware of the omnipresent pressure points in the
system. Take the ongoing onion spike as a perfect example of apathy ? when
un-seasonal rains hit crops, is it really so difficult to predict and take
appropriate action against impending shortfalls in supply? Emerging onion short
supply was well-known months back, corrective action could very easily have
been taken then. Why did we not? And why does this happen repeatedly?
Now going ahead, crude oil prices have moved up, again a trend that
has been on the cards for a few months now, cement, steel and other commodities
have pushed up as well while prices in the auto sector and consumer durables
are now set to factor in these rises in input prices.
To make matters worse, it is not just domestic prices but global
food and commodity prices that are trended up. Whether it is sugar or iron ore,
the story is the same, we are to expect higher prices ahead. Now in such a
situation, is it feasible to look forward to a benign inflationary environment
in 2011? We anticipate consumer price inflation to stay (at best) around the
8-9% range in the year ahead.
Clearly there are structural issues at play here that need to be
dealt with, especially when it comes to food ? anticipating the implications of
erratic weather, higher productivity, better storage, processing, market
reforms, the list is long and well known. There are of course other reasons
lending a hand to inflationary pressures, as we have said all along, the higher
fiscal deficit necessitated by the crisis is one of them, government programmes
that have boosted rural incomes through higher MSPs is another and so on. And
then there is all the cash floating around as high government expenditures on
infrastructure and social spending brings with it the baggage of what has
always euphemistically been termed ?leakages?.
So the economy is heating, though thankfully it is under some
control. But the RBI has a tough job ahead. Of course, a better fisc and
efficient food management could make its life easier, but the government is
either unwilling or unable to oblige.