Notion of economic recovery as portrayed by the Government has again been smashed to bits and pieces as the retail inflation soared to a nine- month high of 11.24 per cent, while the index of industrial production (IIP) shrank 1.8 per cent. Analysts blamed the Government for failing to take appropriate remedial measures for reducing the prevailing high inflation. They further added that the Reserve Bank of India (RBI) has been doing everything it can, but without Government’s support inflation is expected to stay high.
As per data released by the Government, inflation measured by the consumer price index (CPI) crossed the 11 per cent mark in November on account of costlier vegetables and fruits even after the country saw heavy rains during the best Monsoon in the last 20 years. Making matter worse, IIP contracted in October after three months, mainly due to poor performances in manufacturing, mining and consumer durables.
With RBI monetary policy just around the corner, also RBI Governor Raghuram Rajan expressed concerns on the current economic weakness and said, “I think monetary policy also has a role to play in trying to balance demand and supply. Again, as I said, we are aware of the weak economy but we also have to take into account inflationary pressure.”
Talking to The Pioneer, analysts voiced concerns and said that the economic weakness would continue until a new stable Government does not take control at the Centre. Jagdish Thakkar from Fortune Fiscal said, “Inflation soared to a nine- month high primarily due to the steep rise in prices of vegetable and fruits. Vegetables got costlier mainly due to the lack of actions from Government to check the rising prices and political uncertainty. High inflation had dented the consumer sentiment, which resulted in the slowdown in IIP as public avoided heavy purchasing even during the festive season.”
In November, vegetable prices rose 61.6 per cent from a year earlier, compared with a 45.67 per cent increase in October. Fruits were 15 per cent costlier. The CPI data showed pulses were dearer by 1.2 per cent, cereal prices by 12.07 per cent and milk products by 9.06 per cent last month.
Expecting a bleak future for the economy as the US Feds may start tapering soon and the current political scenarios, Ravi Rastogi from Globe Capital said, “All eyes are now on the general elections as only a stable Government now can help improve the economic condition of the country. Even after global economies are showing signs of recovery, our IIP is down only due to domestic reasons. Industry is shying away from investing and is building on their cash reserves as they are now waiting for a new Government before they initiate their capex plans.”
The Government neither was able to curb sharp rise prices of basic commodities nor has been able to take steps to improve country’s factory output. The manufacturing sector, which constitutes over 75 per cent of the IIP, declined to 2 per cent in October as against growth of 9.9 per cent a year earlier. The mining sector, with a weight of about 14 per cent in the index, contracted 3.5 per cent in October as against a dip of 0.2 per cent a year earlier.
Escorts Security’s Ashok Agarwal feel the upcoming RBI monetary policy is going to play a critical role as it would decide the direction not only for stock markets but also given an insight of central bank’s strategy to counter impact of US tapering. He said, “Consumer sentiment is deeply hurt which is reflected in the bad IIP numbers. To make things more difficult for the common man, lack of clear policies to keep a check on high inflation is the real reason which caused CPI to surge higher. The Government needs to work along with the RBI for controlling inflation and also attracting industry to start investing in the economy.”
It seems, RBI is fighting a lone battle and most of the analysts expect things might get worse in the future. Amid high inflation, RBI’s hands are tied and in the upcoming policy it might raise rates by 25 basis points. While some analysts feel RBI might surprise everyone and can announce a cut of 25 basis points in rates and also marginally reduce cash reserve ratio (CRR). By reducing rates, RBI might try to improve the supply cycle by providing cheaper loans to the industry and kick start their capex plans, analysts added.