The recovery process is on

21/09/2014

If there is one clear signal that comes out of the latest set of economic data released on inflation, industrial growth and trade, it is this: the recovery process is on but it is uneven and still in first gear. Wholesale price inflation was down at a five-year low of 3.7 per cent in August but retail price inflation, which is the benchmark for the Reserve Bank of India, is still sticky at 7.8 per cent. Industrial output growth was almost flat at 0.5 per cent in July after a 3.9 per cent rise in June, while export growth fell to a five-month low of 2.35 per cent in August. The see-saw in industrial output, especially of consumer durables and capital goods, clearly shows that the recovery is tentative as yet. Of course, the crucial automobiles sector is beginning to show firm signs of a turnaround with passenger car manufacturers seeing a return of demand. Maruti’s Chairman R.C. Bhargava is on record as predicting at least 5 per cent growth for the industry this fiscal and a 10 per cent growth for his own company. The positive impulses from the auto industry are encouraging because it can have a cascading impact on downstream industries such as ancillaries that host thousands of jobs. Yet, it is worrying that the capital goods industry is still not seeing a viable change in its fortunes. If anything, this indicates that companies are still not willing to commit investment in fresh capacities.
This fact is also borne out by the poor credit offtake from banks. Despite the RBI’s efforts to free up funds through the two cuts made in statutory liquidity ratio over the last few months, banks have not seen any increase in lending, which is something that RBI Governor Raghuram Rajan alluded to a few weeks ago. What lends confidence are two factors — the favourable show by the monsoon in the later half and the downtrend in global commodity prices, notably crude oil. The latter is bound to have a salutary impact on inflation and the fiscal deficit; diesel subsidy, for instance, has already been wiped out. With the next monetary policy announcement of the RBI close at hand, pressure is rising on the central bank to review its hawkish stance now that retail inflation is close to its benchmark of 8 per cent by January 2015. Dr. Rajan, of course does not seem to be in the mood to oblige, going by his remarks a couple of days ago, and rightly so. There is little point in tinkering with rates unless the downtrend in inflation is clearly established, which is not the case now. The approaching festival season will be crucial for industrial growth as purchases of durables and automobiles generally picks up during this period. That may well determine the robustness of the ongoing economic recovery.

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