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Three reasons for caution

Three reasons for caution
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First Published: Thu, Aug 27 2009. 08 55 PM IST
Updated: Thu, Aug 27 2009. 08 55 PM IST
Three bits of economic data released on Wednesday should add a welcome dash of caution to the current expectations of a quick and sharp rebound in Indian economic growth.
First, annual growth in the core sector dropped to 1.8% in July as compared with a growth of 6.8% in June.
The six industries that make up the core sector account for 27% of the Index of Industrial Production (IIP), so it is likely that the IIP number for July could be weaker than expected. A lot of hope was generated by the surprisingly strong 7.8% jump in the IIP in June. That hope could very well be belied.
Second, wholesale price inflation came in far stronger —at -0.95%—than expected for the week ended 15 August. Just about everybody expects wholesale price inflation to start climbing towards the end of the year as the base effect wears off, even as consumer prices are galloping ahead at over 10% a year. But the inflation worm seems to be turning faster than expected. This combination of disappointing industrial output growth and accelerating prices could put the Reserve Bank of India in a spot. Should it be more dovish or hawkish?
Third, outstanding bank credit fell by Rs5,062 crore in the fortnight ended 14 August compared with a year ago. Part of this is surely because of the base effect; there was a credit boom this time last year. But it is also true that growth in bank credit has been sluggish despite talk of an economic recovery.
It is unclear whether this is because of low demand for credit from companies or risk aversion among bankers who prefer to park their money with the central bank. But bank credit is known sometimes to lag rather than lead economic activity, so we are far less concerned about this factor than the other two.
The upshot is that the road to recovery will not be a smooth one. India has done well to stabilize its economy in the middle of a bad global recession, partly due to strong policy action (higher public spending and lower interest rates) and partly due to a greater dependence on domestic demand rather than exports.
But that does not mean that there will be no speed bumps on the way.
Is a full-blown recovery still not here? Tell us at views@livemint.com
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First Published: Thu, Aug 27 2009. 08 55 PM IST
More Topics: Ourviews | Inflation | IIP | Economic data | Views |