Turning around India's see-saw economy

The latest round of RBI inflation expectations survey for the first quarter of 2014-15 indicates that the number of respondents expecting an increase in inflation over the coming three months as well as one year ahead have declined. This is true both for expectations of food and overall inflation.

However, the expected three-month ahead inflation rose while that for a year ahead remained high (unchanged as compared to the Q4 of 2013-14. This is in line with the progress of monsoons over this season with rainfall deficiency remaining high for most of the first quarter.

Going ahead, one does not expect food inflation (with close to 50 per cent weight in CPI) to soar further.
Recent monsoon update by the IMD signals 17 per cent below normal rainfall as of August 11. This is much lower than the 40 per cent deficiency in the beginning of July.

The IMD estimates that during August-September, the monsoon is likely to be normal at 95 per cent of the long period average (LPA) with 43 per cent probability. For the season as a whole, IMD estimates monsoon to be deficient (less than 90 per cent of LPA) at 87 per cent of LPA with a probability of 68 per cent.

IMD has decreased the probability of weak El Nino conditions to 50 per cent during the remaining part of the season. Although rainfall deficiency has declined in recent weeks, CRISIL’s DRIP (Deficient Rainfall Impact Parameter) score CPI shows that coarse cereals such as jowar and bajra, pulses (tur) and soyabean are likely to be the most affected this season.

The government has taken proactive measures to cap the rise in food prices due to monsoons. These include keeping a strict check on hoarding activities, urging states to abolish the APMC Act, raising the minimum export price of onions, and its willingness to offload excess food grain stocks to meet supply shortages.
Given the strong base effect from last year, recovery in rainfall and measures taken by the government, one can expect CPI inflation to hover around 7.5 – 8 per cent in the coming months.

Industry finally looking up?

IIP growth slowed to 3.4 per cent in June compared to an average 4.2 per cent in the previous two months. Industrial growth slowed largely due to weaker growth in manufacturing output – mainly consumer goods. The output of investment-related (capital) goods, however, has continued to grow steadily.

For first quarter (Q1) of fiscal 2015 as a whole, however, the industrial sector has staged a revival, growing at 3.9 per cent after falling by an average 0.7 per cent between October 2013 and March 2014. In recent months, the manufacturing sector has seen a gradual, but sustained pick-up, growing at 3.1 per cent in Q1 compared to a 1.7 per cent decline in the previous quarter.

Manufacturing output which was nearly stagnant for the past two years, steps such as excise duty cuts in auto, and consumer durables, along with improved consumer sentiment following formation of the new government, seem to have brought back growth as they support private consumption demand.

Given the IIP growth in the first quarter and assuming that the construction sector grew at the same rate as in 2013-14, industrial GDP is likely to have grown around 3.3 per cent in Q1 of 2014-15, (compared to 0.2 per cent fall in Q4 of 2013-14 and 0.4 per cent fall in Q1 of 2013-14), signalling an improvement in industrial performance.

This change in underlying trends is also reflected in the recent surveys on industrial outlook and consumer confidence, conducted by the Reserve Bank of India, which are pointing towards a pick-up in consumer and business sentiments.

Consumer confidence improving

The RBI’s consumer confidence survey results show a steep improvement in future expectations on employment outlook, and salary and business incomes. More than 60 per cent of the respondents expected an increase in income 12 months ahead.

While, the ‘Current Situation Index’ remains close to the threshold of 100, there is a significant improvement in the ‘Future Expectation Index’ which measures the one-year-ahead outlook. Respondents have shown higher confidence (more than a third in the current survey compared to one-fourth in the previous survey) in undertaking spending and readiness to spend on big ticket items such as house, consumer durables and gold.

About 1,293 manufacturing companies which participated in this survey conducted in May-June 2014, see a further improvement in business conditions in Q2 of 2014-15 vis-à-vis Q1 of 2014-15.

Respondents showed improving optimism on production, order books, external trade, as well as employment outlook, while there was also improved outlook on costs of finance, raw material and the profit margin.

(The author is Principal Economist, CRISIL Research)