Indian economy’s recovery –How real and sustained?
India’s economic recovery patchy but promising
The latest economic data released by the government with regard to inflation, industrial growth and foreign trade has one un-refutable conclusion. The economy is slowly getting back to its feet, but areas of weakness still persist. The pervasive gloom is gone, and the green shoots are visible.
The Wholesale price inflation has come down sharply dropping to 3.7% in August, 2014. It is the lowest level recorded in the last five years. But, retail price inflation, the index that the Reserve Bank of India (RBI) watches most keenly is hovering around at a high of 7.8%. Another worry is the insipid Industrial output growth in July, 2014 which recorded a disappointing 0.5% growth. It has plummeted to this near-zero level from 3.9% recorded in June, just a month earlier. Another worrying sign is the export figures of August, 2014 that has shrunk to 2.35%, lowest in the preceding five months. The patchy performance in respect of manufacture of consumer durables & capital goods dampens the optimism considerably. It shows that the economy has much catching-up to do.
The automobile sector, a major driver of industrial economy, seems to have left behind its sluggish era. Passenger car sales are up after a long period of buyers’ apathy. The Chairman of Maruti Ltd. Mr. R.C. Bhargava has exuded confidence that passenger car manufacturing will increase by at least 5% for the aggregate car industry. His own company Maruti might grow faster than others reaching a level of 10%. The growth of auto manufacturing spurs the growth of its large number of ancillary industries. This, in turn, will generate jobs in thousands, besides boosting government’s income from taxes and duties. But, a robust growth of the capital goods manufacturing can only signal a sustained period of brisk economic activity. Perhaps, companies are still adopting a wait and watch approach to see how the Modi government’s economic push translates to action on the ground.
Poor credit offtake from banks somewhat points to the fact that the economy has not quite woken up from its slumber. To nudge the banks to lend more, the RBI cut the Statutory Lending Ratio (SLR) twice in the last few months, but the demand from industries for fresh loans remains low. This concern was aired by the RBI Governor Raghuram Rajan a few weeks ago.
But, there are some unmistakable positive signs. Monsoon, weak in the initial stages, has revived considerably almost in the whole of the country. The second is the downward trend in global commodity prices. Crude oil prices have fallen, easing the pressure on India’s Current Account, and helping the oil companies to keep the prices of petrol and diesel prices low. This will help the government’s efforts to rein in inflation.
As a consequence of the low crude oil prices, subsidy on diesel has been reduced to nil – a very welcome development for the macro economy management. The next monetary policy announcement of the RBI is around the corner. Quite naturally, the central bank is coming under increasing pressure to cut interest rates that could give an instant push to economic activities. But, with retail inflation sticking to a high 8% level, Dr. Rajan might find his hands tied in the matter. He will continue to stay focused on curbing inflationary pressures – his main responsibility as RBI’s head. Economic pundits will side with Dr. Rajan in the latter’s insistence on seeing sure signs of a decline in inflation rates before he cuts interest rates. The approaching festival season might usher in more buying of consumer goods, and motor cars and motorcycles by the public. Hopefully, this will mark the turning point for the economy, desperate to unshackle itself.