Growth worries

The government should rightly be accused of having a factory fetish. The 2.4 per cent recovery of industrial output year-on-year in January is encouraging on the manufacturing side,  while the signs are mildly encouraging on the consumer non-durables front. Viewed in its entirety, industrial output has contracted in six out of the ten months so far this fiscal with declining exports adding $6 billion to the trade deficit.

If RBI does cut rates in the 25-50 basis point range on March 19, that would be predicated on a pickup in the farm sector (backed up with a good monsoon) and containment of headline inflation (as opposed to slower inflation growth). Headline inflation as measured on the wholesale price index, which remained above 7 per cent for the last three years slowed down to 6.6 per cent in January, though it is well above RBI's comfort levels.

RBI had eased repo rates last month at the mildest signs of inflation containment, and the prospect of the apex bank adopting a wait-and-watch attitude on executing a successive rate cut cannot be ruled out. As senior RBI officials have stressed in the past, multiple levers exist to moderate inflation and stimulate demand in lieu of lending rate cuts – though most of these measures are vested in the touchstones of government policy and standards of execution. Extrapolating this into fiscal 2014, while industrial production has improved gradually since the third quarter of fiscal 2013, a faster recovery could remain elusive.

This is not to say that the case for another rate cut is weak, for the growth inflation dynamics are ‘cautiously optimistic.’ Consumer price inflation in February was stable, though fuel and food inflation rule at elevated levels. Gross capital formation in the manufacturing sector had declined in 2011-12 and shows no signs of uptick in the current fiscal. Last month's Economic Survey had noted that together with deceleration in growth of investment, excess industrial capacity appears to persist. Current account deficit remains high. The government’s dream of depending less on exports by rebalancing demand towards consumption can only happen with a surge in labour-intensive services which stoke faster job creation, higher wages and greater household spending. While consumer goods production has improved, it remains to be seen if the momentum will be maintained in the coming months as the government’s austerity drive parallely picks up steam.

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