Murky macroeconomy

Growth, inflation and external stability are caught in gridlock

The index of industrial production (IIP) numbers for April 2013 came in somewhat below expectations. While analysts' views were converging around 2.8 per cent growth over April 2012, somewhat better than the 2.5 per cent recorded in March (though this has been revised upwards to 3.4 per cent), the number actually came in at two per cent, denting hopes that a recovery, however modest, was in progress. The data sceptics can take heart from these numbers, though. In March, garments were estimated to have grown by over 150 per cent. In April, they grew by a mere 87 per cent! Amazingly, both these surges were accompanied by a rather sluggish performance by the textiles sector - 2.9 per cent in March and five per cent in April - raising the question as to what all those garments were being made from. If it were assumed that there is some overestimation of garment production during these two months, then growth in both March and April would have been even lower than suggested by the index. The bottom may have been reached, but it looks like it's here to stay awhile.

The new consumer price index (CPI) numbers were also published yesterday. The good news is that the inflation rate for May, at 9.31 per cent, is lower than the April reading, though only marginally. The bad news stems from what is driving consumer inflation. On the food front, cereal prices rose by over 16 per cent year on year, a rate far higher than all the other food categories. Not that there was much relief there; those continued on their steady pace of 9-10 per cent. The CPI, however, has a relatively high rate of non-food inflation, around the same as the headline rate. This is in sharp contrast to the patterns recently observed in the wholesale price index (WPI), for which the May numbers will be out tomorrow. The question is: if producers are finding it hard to increase prices, how is the retail chain managing to do it? And does this divergence increase the margin of error for monetary policy making?

The monetary policy scenario has become significantly more complex as a result of the sharp rupee depreciation in a short period of time. This will slow, if not reverse, the downward trend in inflation over the next few months. Further, in the absence of a rapid increase in capital inflows - for which there are no obvious triggers, either external or domestic - the likelihood is that the rupee will continue to lose value, intensifying inflationary pressures even more. Prolonged sluggishness in growth amidst a global recovery could help narrow the trade gap through lower imports and higher exports. But even if this is plausible, it will take some time. In any case, with the political system rapidly moving into election mode, economic issues, even critical ones, can be expected to take a back seat for now. Is history repeating itself, and if so, as tragedy or farce?