On Tuesday, Union Finance Minister Nirmala Sitharaman said several indicators have emerged that point to green shoots in the economy
. These include, the minister said, improved global sentiment and a rebound in industrial activity. Post-the dismal factory output numbers and the average growth trends so far this fiscal, the claim of revival in industrial activity is questionable. More importantly, the state of manufacturing segment growth is a point of concern. This is one of the segments that produces jobs for millions of workers.
The twin set of macroeconomic data released on Wednesday doesn't augur well for the economy. The Index of Industrial Production
(IIP), a key measure of economic activity, contracted by 0.3 percent in December compared with a growth of 1.8 percent the previous month. The main villain here is the poorly performing manufacturing sector. This confirms fears that the jump in factory output logged in the previous month was a temporary blip. The economy continues to struggle. What adds to the worries is a spike in retail inflation in January.
The Consumer Price Index (CPI) rose to 7.6 percent in January compared with 7.35 percent in December. What has led to the price hike? Food items including eggs, meat, vegetables. Retail inflation has stayed out of the Reserve Bank of India's (RBI) comfort zone for the second month in a row. The RBI has a 4 percent target with 2 percent plus or minus on either side. In the nine months of this fiscal, the IIP has averaged 0.5 percent as against 4.7 percent in the corresponding period of the previous month. Thus, if one looks at a pattern, the factory output has expanded nearly flat in the ongoing fiscal year so far.
The takeaway from these numbers is that the dangerous combination of high inflation and low growth continues. The economists call it stagflation and cautions that when large economies fall into this trap, it takes an even bigger time period to recover.
What is the immediate implication of high inflation-low growth combination for policymaking? The numbers tell us that the monetary policy committee
(MPC) was right in holding rate in its last review and, in a logical scenario, the high inflation should continue worrying the MPC, the rate-setting panel, which would mean the status quo in key rates should continue in the next policy meeting as well. In a research note, SBI economic research said that inflation seems to be becoming broad-based. "Inflation is expected to remain high next two months, close to 7 percent thus averaging above 7 percent for Q4 FY20 (RBI forecasts at 6.5 percent). Inflation will slide down gradually in FY21 and could slide to less than 3 percent in December'20. We believe RBI will stay for an extended pause in calendar 2020," the report said.
If there are no rate cuts, that will put the burden of supporting growth back to the government. In the last policy, the RBI announced a slew of measures to increase credit growth. But who will the banks lend to if there is no genuine demand?
These figures also don't go well with the stance of a conservative Budget presented by Union Finance Minister Nirmala Sitharaman, who earmarked very less extra spending to reboot the economy amid the slowdown. As a percentage of the GDP, the total Budget expenditure is just 0.3 percent higher than the last year. The government pegged total expenditure for FY21 at Rs 30.42 lakh crore or 13.5 percent of GDP compared with a total expenditure of Rs 26.99 lakh crore (revised estimate) or 13.2 percent of GDP in FY20. That's just 0.3 percent increase over a year; not what a sinking economy needs. At an average 0.5 percent growth this fiscal, factory output numbers do not go well with the suspected green shoots in the economy, which the government seems to have identified.
(Data support by Kishor Kadam
Original Source: https://www.firstpost.com/business/trend-of-high-inflation-low-growth-continues-no-strong-revival-signs-yet-all-we-have-are-warning-signals-8037011.html