Two positives on the economy

Time to press ahead with reforms

The July numbers for the Consumer Price Index and the June numbers for the Index of Industrial Production were published yesterday. The first indicator yielded some positive news, which was reinforced to a degree by the second. Consumer inflation fell sharply from a somewhat worrying year-on-year 5.4 per cent in June to 3.78 per cent in July. Even more strikingly, food inflation declined from 5.48 per cent in June to 2.15 per cent in July. These numbers were significantly below market forecasts, which hovered around the 4.4 per cent mark. The main reason for this deviation is that the rate of increase in food prices fell much more sharply than expected. Given the early concerns about an inadequate monsoon and its adverse impact on food production and prices, this comes as an extremely welcome development for consumers and the government. The only major food item which saw some pressure was pulses, the prices of which increased by over 22 per cent. Also, vegetable prices saw a decline in July, which could reverse in August. But, with the monsoon panning out very well in the first half of the season, area sown for pulses is likely to have increased, which should contain further price increases as the harvest comes in. Overall, this is as benign an inflationary scenario as the economy has seen in a long while.

The news on the industrial production front, though not as upbeat, was also unambiguously positive. The general index showed an increase of 3.8 per cent, reinforcing perceptions of a steady, even if modest, recovery. More importantly, the manufacturing component of the index, which accounts for about 75 per cent of the basket, grew by 4.6 per cent year-on-year. Bellwether industries like basic metals and motor vehicles grew by about 11 per cent and seven per cent respectively. Not all industries showed positive growth, of course, but that is in the nature of things in the early stages of a recovery. Looking at the use-based classification of manufacturing sectors, capital goods declined somewhat, but on a relatively high base last year, while consumer durables surged, also partly attributable to the relatively low base of last year. Overall, it appears that the recovery is becoming more broad-based, as the dispersion across growth rates of different industries appears to be narrowing.

The inflation numbers will strengthen the voices of those who believe that the Reserve Bank of India should have cut the repo rate last week. They will also raise expectations that the next cut will come before the scheduled announcement in October. That would be an entirely appropriate action, with the threat of a strong resurgence in food prices steadily receding. However, the broader concern is that the government's apparent inability to push the structural reform agenda forward is letting an extremely favourable macroeconomic situation go waste. Surely, the government does not want to reinforce the cynical view that reforms will only take place in a crisis situation. And, it must not forget that the capacity of the recovery to accelerate and sustain depends critically on increasing investment. There are few signs of this happening at a level that will make a significant difference. Safe and steady it may be, but that is hardly enough.