Growth and inflation

IIP, inflation numbers bring cheer, but their sustainability is the key

The April numbers for the index of industrial production (IIP), released on Thursday, brought some cheer on the growth front. The IIP grew by 3.4 per cent, its highest in a long time. April, of course, was a month in which the entire country was deep in electioneering. Therefore, some sort of stimulus from all the campaign spending might have been reasonable to expect. The biggest beneficiary of this was the category of "electrical machinery", which grew by over 66 per cent year on year, reflecting all those campaign rallies, with their generators and audio equipment. The other significant contributor to the growth in the overall index was electricity, which grew by almost 12 per cent year on year, significantly higher than its growth during 2013-14. Typically, a growth acceleration that relies heavily on one or two sectoral surges does not have much staying power. It would require an across-the-board show of resurgence to allow people to conclude that a sustainable recovery was under way. That is clearly not happening yet. However, these numbers do reinforce the perception that things are not getting worse as far as growth is concerned.

Likewise, there was some room for relief on the inflation front. The consumer price index, or CPI, numbers for May 2014 showed headline inflation declining slightly, from 8.6 per cent in April to 8.3 per cent in May. The Central Statistical Office is now separately reporting a sub-index labelled consumer food price index, or CFPI, which provides some convenience to observers. The index itself, though, offers little cheer. It came down modestly between April and May, largely explaining the decline in the headline rate, but is still significantly above nine per cent. At a time when there are concerns about the performance of the monsoon and the impact of that on food prices, these numbers should be a major cause of worry for the government. Milk, eggs, fish and meat, vegetables and fruit contributed to the persistence of food inflation. But cereals are also kicking in, as they have been for the past couple of years, and the government must use its large stocks of rice and wheat quickly to dampen at least this source of food inflation. It would be unconscionable not to do so when risks of a resurgence of inflation are high. The larger point on inflation, though, is how stubborn the rate is despite sluggish growth and high interest rates. The limitations of monetary policy are being repeatedly underscored.

Against this backdrop, the government's prioritisation of its fight against inflation is an extremely important development. It has to move quickly from intent to action on a variety of reforms, from procurement policy to subsidies and to investment in rural infrastructure. Many of these will generate benefits only over the medium term. So those expecting a growth stimulus from the Reserve Bank of India any time soon are bound to be in for a disappointment. Even so, room for optimism should come from the fact that this government does have the capacity to design and execute long-term strategies with complete credibility. The simple equation that it needs to keep in mind is that inflation will not subside unless food prices moderate and growth will not recover unless inflation subsides.