There is a rare consensus amongst policymakers, academia, industry
and policy institutions that 6 to 8% inflation is here to stay. There is also
an emerging consensus that growth this year will be in the 7.5 to 8.5 percent
range. As of now it appears that there are only two organizations left who
still believe that 8.5% + growth is possible this year ? the CMIE and Indicus!
What is it about the data that indicates continued positive
momentum in the economy? First and foremost is demand- despite rate hikes, most
sectors are seeing increases in orders; credit off-take is much higher than
last year (April commercial bank credit rose by 22.1% yoy compared to 17.1%
last year); we have had two strong agri seasons for the last two years and it
appears this year would be good as well. Confidence is still strong - the CII
Business Confidence Survey shows that investment plans are on-going unaffected
across most sectors, with spending on capital expansion high on the agenda, the
Indicus MSME Business Confidence Survey, part supported by SIDBI, also shows
optimism about growth this year. As to inflation, primary product inflation is
trending down and manufactured items is set to stabilise in the 6-7.5% range
over the next few months.
Despite all these positives, manufacturing growth has been falling
for 4 quarters, rates have been rising rapidly and, with a more aggressive RBI,
are expected to continue to rise in coming quarters. There has also been a
continued fall in investment, with the last quarter showing just a 0.37% growth
in gross fixed capital formation over the last year.
Most important, the government seems to have decided to only do the
bare minimum that is expected of it; economic reforms will have to wait for
some other persons and some other time. Instead the government is spending more
time in instituting new welfare schemes, changing poverty definitions, and
arguing with civil society about corruption. The sweet spot right after many
election victories is now getting over and almost no growth or efficiency
enhancing decisions have been taken. A UPA that started off with the cream of
reformers, it seems, has only one potential reformer left - Pranab Mukherjee.
But even he is unable to push through what he knows is needed ? raise petro
prices or risk the bankruptcy of the best of his navratnas.
The rest are busy claiming that FDI in retail will ensure lower
inflation. Actually it won?t; for that to happen lots more is needed.
Agriculture markets are highly fractured, many of these fissures are the result
of badly thought through regulations and laws. This, the government and just
about every one of its advisors knows very well, but is powerless or unwilling
to change. Moreover, announced reforms are in name only- four months of rising
crude oil price did not automatically lead to raises for the so-called
decontrolled petrol price.
Non-agri commodity inflation can be addressed partly through
enabling the many mining and basic industry projects, most of which are delayed
because of the trust deficit. Nobody these days believes that rehabilitation
norms would be followed, or compensation would be adequate, or for that matter
environmental damage would be minimized. Consequently mining and basic
industrial projects are stuck. The trust deficit vis-?-vis the government?s
ability to adequately regulate has finally translated into a production and
supply deficit. Meanwhile, wage inflation is again roaring; though this time
even the lower end human capital is benefiting, capacities and capabilities in
vocational training still lag demand.
FDI in retail will not take care of this core problem - the policy
makers? inability to reform. It appears that the RBI knows this, rate hikes
purportedly aimed at cooling inflation are actually aimed at cooling demand-led
growth. India is well on its way to giving up the 8.5 to 9.5% growth that it
could achieve with little effort and will have to settle for 7.5-8.5%.
P.S. Indicus is pleased to announce the launch of its Centre for Financial Inclusion, with support from the
Bill and Melinda Gates Foundation.