'Many in body, one in mind'

Inflation pressures remain elevated even as there is growing concern about the pace and extent of economic slowdown. Headline WPI Inflation has risen by average 9.6 per cent during the current financial year from April-September and has remained above nine per cent for most of the period since February, 2010. Initially inflation was led by primary articles particularly food but now inflation has become more generalised as seen by the over seven per cent rise in core inflation, which suggests that producers are able to pass on the inputs costs, indicating sustained demand-side pressures. Whichever way one looks at it — headline, core, food, fuel — inflation is unacceptably high and remains a big concern. Besides, with rupee weakening, imported inflation is another worry. Higher market borrowing by the Centre and potential fresh quantitative easing in developed economies could add to domestic liquidity fuelling inflationary pressures.

At the same time, the economy is clearly slowing down. In July industry grew by 3.3 per cent, slowest pace in the last 21 months. Core sector growth at 3.5 per cent in August was an 11-month low. With slowdown in manufacturing, excise duty collection has shrunk. What is disconcerting is that the PMI has dipped close to contraction. New investment announcements reached a nine-quarter low of Rs 2.59 lakh crore covering 770 projects in September ( of which 80 per cent was by the government) against 1,256 projects worth Rs 7.16 lakh crore announced in June, 2010; 120 projects worth Rs 2 lakh crore were shelved in September, 2011. Reportedly, even engineering giants like BHEL and L&T are seeing little addition to their order books. With slowing exports, domestic consumption dependent on export incomes and domestic investment to feed export demand will also be affected.

Credit has also softened. In the current financial year, till October 7, ASCB deposits grew faster at 8.0 per cent against 6.7 per cent a year ago while credit growth was slower at 5.2 per cent than 7.0 per cent. Consequently, incremental credit deposit ratio has slowed to 49.5 per cent from 76.1 per cent a year ago.

So, clearly, the macroeconomic canvas is complex. But is this enough to force the Reserve Bank of India’s (RBI) hand? Inflation remains stubbornly high, global commodity prices are high despite a weakening global recovery and there are as yet little signs of downward movement in the inflation trajectory that RBI wants to see. So, the current growth inflation dynamics could see an increase in the repo rate by 25 bps.

But further slowdown could exacerbate supply constraints. So, going forward, to dampen demand and fight inflation, we will need to address these issues collectively in the Japanese spirit of itai doshin or many in body but one in mind.

The writer is General Manager & Head Economic Research, State Bank of India, Mumbai