Policy headroom

Both inflation and production are low

The April number for the Consumer Price Index (CPI) and the March number for the Index of Industrial Production (IIP) were published on Tuesday. As regards consumer inflation, the headline number came in at 4.87 per cent, appreciably lower than the 8.48 per cent recorded a year ago and comfortably below the 5.25 per cent seen in March. Particularly striking was the fact that food inflation came in at 5.11 per cent, over a percentage point below the March number. In light of concerns about the impact of weather-related shocks to agricultural production, the steady moderation of food inflation suggests that the supply disruptions were not as large as feared. Cereal inflation was a minimal 2.15 per cent and even vegetables, which have been a significant driver of food inflation in recent years, clocked a modest 6.63 per cent. The only source of worry are pulses, which, after a while, showed double-digit rates of increase in prices. Overall, the fears of an inflationary resurgence driven by food should now abate.

In contrast, the picture on industrial production was negative. The overall index grew by a rather sluggish 2.1 per cent year-on-year, a sharp decline from the five per cent recorded in the previous month. Manufacturing, which accounts for about 75 per cent of the index, was clearly the main cause of this, growing by 2.2 per cent in March, which took its growth for 2014-15 to a pallid 2.3 per cent. Of course, the revised gross domestic product (GDP) numbers suggest a widening disconnect between production, which the IIP tracks, and value added, which is the basis of economic growth. Consequently, the relatively low growth in production may not cause too much of a change in the rather optimistic GDP growth projections. Realistically, however, this disconnect cannot sustain itself for very long; sooner rather than later the two will no doubt converge. Notably, persistent sluggishness in industrial production should worry policymakers in and of itself. Going below the aggregates, the performance of various categories of industrial goods also suggests that several key industries are yet to enter recovery mode. While capital goods have done reasonably well during the year, growing by 7.6 per cent in March and 6.2 per cent for the whole year, this has happened on an extremely low base. Consumer goods have done poorly, with durables in particular declining by 12.5 per cent during 2014-15 and doing only slightly better with a decline of almost five per cent in March.

Even if the Reserve Bank of India (RBI) focuses exclusively on consumer inflation, the April number strengthens the case for a rate cut in the June policy announcement. The two potential disruptive factors pose modest risks at this point. The south-west monsoon may turn out somewhat below normal, but the forecast is far from dire. Oil prices are rising again, but appear to be capped at somewhere below $70 a barrel, hardly a strong inflationary level. Of course, the case is strengthened by the industrial production numbers, which suggest that while a recovery is under way, it is showing very few signs of consolidating. For monetary policy, there can be no stronger argument for a stimulus than when both inflation and growth are low. Notwithstanding the revised GDP numbers, which even the RBI seems sceptical about, that is the situation now.