Struggling economic indicators are hardly playing “ring-a-ring-a-roses” in India. But the macro news of the past few days suggests these reached the “all-fall-down” point, as it goes in the playground ditty. The leader of course, is the falling currency, which touched Rs 54 to a dollar, tossing aside the intervention of the central bank on its way down.
Irrepressible inflation is cheek-by-jowl with the rupee. April data released on Monday was a shocker: this showed wholesale price index (WPI) inflation at 7.2% year-on-year, against March’s 6.9% and an upwardly revised inflation rate in February at 7.4% (7% earlier). The resurgence of inflation isn’t just an embarrassment to the Reserve Bank of India’s hasty 50 basis points policy rate cut in the same month. It also adversely influences the inflationary expectations of investors, especially foreign ones that are sorely being missed out here in the playground. Core inflation, a decent print of 4.9% year-on-year in April (against 4.7% in March), will undoubtedly harden in the coming months as the weak currency effect feeds through.
So India TV finally makes it to the headlines...rather than making headlines.
Before inflation and the continuously falling rupee, it was industrial output that hugely belied consensus forecasts (1.7%) for March by contracting 3.5% year-on-year. The data showed both consumption and investment weakening. Although capital goods led the fall with a 21% decline year-on-year, even the resolute Indian consumption that has held up so far shows signs of cracking up; it grew a meager 0.2% year-on-year, admittedly impacted by the previous year’s strong base. Rating agencies are adding their bit to this downfall. On Monday, Moody’s downgraded LIC and several major banks as a follow-up to the Standard and Poor’s earlier downgrade of the country’s outlook from stable to negative. Heaven forbid they touch India’s investment grade rating, which remains unsullied so far.
There isn’t much macro policies can do to uplift these numbers in the short term. The rupee is driven by an unsustainably large current account deficit, inflation is caused by fiscal laxity and supply-side rigidities, while industrial output is a victim of hugely uncertain domestic and external circumstances, joined by high interest rates and sundry policy messes and delays. RBI’s monetary tenderness of April is shocked into silence after it failed to revive even market sentiment; in any case, the cue remains to be transmitted as the central bank has been forced to intervene in support of the currency, pushing up short-term interest rates in the process. Inflation resurgence counters the case for lowering interest rates at this point as well.
Sometimes, bad times simply have to be lived through; wait it out for dawn to come. Indeed, a sliver of light is suggested by the seasonally adjusted industrial production numbers (three-monthly basis) indicating a pick-up in momentum. The OECD’s Composite Leading Index, which has a good 7-8 month lead over industrial production, also shows a steady upward trend since October last year, though the pace slowed a bit in March. The point about reaching all-fall-down in the game is that everybody stands up again, hand-in-hand.
Renu Kohli is a New Delhi-based macroeconomist; she is a former staff member of the International Monetary Fund and Reserve Bank of India.