Growth comes last

Trade deficit falls, inflation steady, but industry still frozen

Efforts by both the fiscal and monetary authorities to address inflation and the external account appear to have had a predictable effect. The various statistics released on Monday show that India's balance of trade for July has sharply decreased year on year; consumer price inflation for the same month has moderated; all at the expense of growth, with the index of industrial production for June down sharply year on year. This news, combined with a recent doubling down on such policies by the government, will likely indicate to observers that India has given up on restoring economic growth till some form of macro stability reappears.

In figures for June 2013, the index of industrial production is 2.2 per cent lower than it was in June 2012; it has shrunk marginally compared to May 2013, too. Growth in electricity output, which had helped prop up industrial production through much of 2012, is now stagnant; and mining continued to contract, shrinking 4.4 per cent year on year. Worryingly for the future, capital goods shrank 6.6 per cent year on year, indicating few plans for investment; and consumer durables decreased 10.5 per cent year on year, suggesting households are postponing consumption, too. There is no end in sight to the crisis in Indian manufacturing.

Meanwhile, consumer price inflation went down to 9.6 per cent year on year in July, compared to 9.9 per cent the previous month. Many analysts had feared that it would touch 11 per cent. Food inflation continued to drive higher prices; it was in double digits overall and 12.4 per cent in urban areas. This, of course, continues to be well out of the comfort zone of the Reserve Bank of India (RBI). It remains to be seen whether wholesale price inflation, which has diverged by over five percentage points from consumer inflation in the past, will also moderate.

On the external front, there appears to be some respite in the figures for July 2013: exports were 11 per cent higher in dollar terms than in July 2012, and imports six per cent lower in dollar terms. Overall, this means a sharp fall of almost 30 per cent to the dollar trade deficit in July 2013 compared to July 2012. Crude oil imports, in particular, fell eight per cent in dollar terms in July 2013 year on year. Both the months of July 2012 and July 2013 saw oil rise from below or around $100 to the barrel by between $6 and $8, so the world prices were broadly comparable. It remains to be seen if these figures for the trade deficit in July are sustained over time; the trade deficit for the period of April-July 2013 is still higher year on year.

It is an open question how the government and the RBI will react to these figures, which show inflation high but steady, and the trade deficit declining, at the cost of a continued manufacturing slowdown. In the absence of an explicit policy shift to growth instead of stabilisation, this may well be the trend for the next few months.