Revival risks

Revival risks

Context

The Centre’s bid to dispel the pall of gloom over the economy has been helped in recent weeks by a sovereign rating upgrade from a global agency and a sharp improvement in India’s rank on a World Bank index for ease of doing business.

With prices rising and manufacturing slowing, the economy is still not out of the woods

The economy clocked a growth of 6.3% in the second quarter of this year, after slowing for at least four quarters.

Rising oil prices could pose a roadblock

But official data for the third quarter (October to December) so far suggest that the economy is still not entirely out of the woods and fresh headwinds, such as rising oil prices, could upset the fragile recovery 

Manufacturing growth driven restocking

Manufacturing growth, driven by restocking by producers after the rollout of the goods and services tax, was a major factor in the second quarter growth pick-up.

IIP slipped in October

After two months of robust 4%-plus growth, industrial activity however slipped in October, with the Index of Industrial Production reflecting just 2.2% growth. 

Performance of various sectors

• October was a festive month but consumer durables production contracted by nearly 7%, mining was virtually stagnant, and manufacturing growth moderated to 2.5% from 3.8% last year
• This coincides with exporters seeing a 1.1% slump in shipments in October, after growing at an average of over 13% in the second quarter
• It is also borne out by the nearly 10% drop in GST collections that month compared to September

Slower Growth

The IIP has now grown just 2.5% in the first seven months of 2017-18, compared to 5.5% in the same period last fiscal.

Inflation rising

If the spectre of slower growth with weak exports at a time when global trade is recovering is not worrying enough, with job creation still to pick up, the latest inflation data set too is cause for concern

Prices at the consumer level rose at the fastest pace in 15 months this November, with inflation touching 4.88%, up from 3.6% in October and just 1.5% in June

This reflects a broad-based price rise under way, although it is led by fuel inflation (at 7.2%, from 6.1% a month ago) and food inflation (4.4%, from 1.9% in October)

Food prices shoot up

Within food, rising onion and tomato prices pushed vegetable inflation to a 16-month high of 22.5%; inflation in egg prices quickened from 0.8% in October to 8% in November.

Rise in Core Inflation

While some of this food inflation could wane in the coming months, there is greater concern about the rise in core inflation (excluding food and fuel) and inflation imported through high global prices

Oil Prices increasing

On Tuesday, oil prices breached the $65 a barrel mark for the first time in over two years.

Hard Choices

The government faces difficult choices

• Slashing fuel taxes could calm inflation, but it would hit revenue collections that are already uncertain owing to GST deadline extensions
• Not doing so would leave less room for the central bank to lower interest rates.
• As the Economic Survey said, oil at $60-65 could hit consumption and public investment and dent private investment further. That is not a path to a sustained revival.