|Still some growth left|
|Tuesday, 13 September 2011 00:00|
Come Friday, will RBI see a sharp slowing of growth with the IIP falling (IIP grew 3.3% in July 2011) to the lowest levels over the last 21 months, or will it focus on the fact that April to July IIP still grew at 5.8% and that the July 2011 data looks lower than it actually is due to what’s called the base effect—in July 2010, IIP grew 10%. Which way RBI sees things will determine how it reacts in its long battle—11 consecutive increases in key policy rates—against inflation.
The data, it has to be said, remains confusing even though there is an overall trending down, and underscores the fact that India needs reliable datasets yesterday. It is difficult to reconcile the IIP with the near-50% growth in merchandise exports, which account for almost 90% of products included in the IIP. The sharply lower PMI, at 52.6 in August, is the lowest since March 2009 and the capacity utilisation index is also down at 49.6 as compared to its highs in November 2010; at 53.8, services PMI is also at its lowest since June 2009. But it is difficult to reconcile this with a 10%-plus growth in basic goods in the April-July period. Consumer spending also looks better—it rose from 2.3% growth in June to 6.2% in July.
Whichever way RBI looks at the data, the most important issue is the impact of its inflation-control measures and what is causing inflation to behave the way it is. Our oped columnist today, Surjit Bhalla, makes interesting points. For one, when RBI cites its inflation expectations survey to justify its actions, Bhalla argues that since respondents know the WPI inflation for almost three-fourths of the year, the ‘expected’ inflation is really just a projection of the past. Also important to keep in mind is that since the UPA came to power in 2004, the relative price of agricultural goods to non-agricultural goods have risen by over 30%, while the relative price of manufactured non-food items to WPI have fallen by more than 35% (and more than two-thirds of this loss came in just two years: pre-election year 2008 and election year 2009). As for why this has taken place, Bhalla’s model shows that for every 10% increase in MSPs, CPI rises by 3%. In other words, a lot of the inflation we’ve seen, and will see, is related to policy RBI has zero control over.