Economy remains in a trough, RBI must step in
Though August IIP has grown a better-than-expected 2.7%, as compared to a decline of 0.2% in July and minus 1.8% in June, the number has been puffed up a bit by inexplicably high growth in food products/apparel/radio-TV equipment. According to CLSA research, the three add up to 1.5 percentage points, taking away from the headline number considerably. Between April and August, even if you don’t account for this, IIP grew just 0.4% as compared to 5.6% in the same period last year. In which case, we could well end up with a 2.5% IIP for the year, taking the year’s GDP growth to the lowest in a decade. With capital goods falling a massive 13.8% in April-August (against a growth of 7.3% in the same period last year), it’s obvious the investment scenario has only got worse. Nor is the slowdown data restricted to the IIP. Exports in September were 10.8% lower than they were in the same month last year, and this is a trend we’ve seen regularly since May when exports fell 4.3%—in April, there was a small 3.2% growth. Though imports grew 5.1% in September, this was mainly due to oil imports which rose 30.7%—as a result, non-oil imports fell 4.5% in September. For the April-September period, non-oil imports were 9.3% lower than they were in the same period last year. Even worse, with outstanding food-credit on September 21 at R46,73,909 crore, this means just a 1.06% growth since April this year.
Though headline inflation numbers suggest RBI shouldn’t cut rates this time around, it’s not clear what it’s strategy is since progress on cutting the deficit is going to be weak—the government has made a start with a 30% cut in diesel under-recoveries and a cap on LPG subsidies, but lower economic growth means there will be large undershooting of the tax target. Other reforms steps have been initiated even if Parliament may not pass all of them. And the moves on GAAR, on retrospective taxation, on retail-FDI among others have excited investors—the National Investment Board is another such, but has to demonstrate its effectiveness. In which case, RBI can’t take refuge in the old argument that the government wasn’t doing its fair share of the heavy lifting.