New Delhi: There was more bad news about India’s economic situation on Thursday, with data showing that inflation accelerated, and both exports and imports contracted—the latter is a sign of falling demand.
Coming days after factory output signalled a flatlining economy, the inflation data has intensified the dilemma faced by the Reserve Bank of India (RBI), whose mid-quarter review of the credit policy is scheduled for 18 June: should it keep interest rates at the current level to rein in inflation, or should it ignore inflation and cut rates to spur economic expansion?
Mint’s Asit Ranjan Misra say, with the recent WPI inflation figures, more bad news pours in about the country’s economic situation
Late on Thursday, RBI governor D. Subbarao said the central bank “can’t kill inflation without sacrificing growth”. Subbarao was in Hyderabad to deliver the K. Obayya Memorial Lecture.
India’s headline inflation based on wholesale prices accelerated in May to 7.55% from 7.23%. Data separately released by commerce secretary S.R. Rao showed that exports and imports contracted by 4.1% and 7.3%, respectively, in May. This marks the first contraction in imports since September 2009. In value terms, exports and imports stood at $25.68 billion and $41.9 billion, respectively, during the month leading to a relatively smaller trade deficit of $16.2 billon.
While the contraction in exports reflects worsening global demand in India’s traditional markets such as the US and the European Union, the contraction in imports signals a broader slowdown in the domestic economy, especially since non-oil imports have contracted by 12% in May over the same period last year.
Ahmed Raza Khan/Mint
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All the major export-oriented sectors such as engineering, petroleum products, gems and jewellery, and readymade garments contracted during May. On the import side, while the import of petroleum products rose, that of others, including gold and silver, machinery and electronic goods, contracted during the month.
A rush of depressing economic data—a sampling would include a nine-year quarterly low in economic growth in the last quarter of 2011-12, flat growth in factory output in April, and a seven-month low, in May, in the demand for new cars—had already signalled a broader slowdown in economic activity in Asia’s third largest economy. While many economists said that the current high inflationary scenario did not warrant a rate cut by RBI, they maintain that the absence of credible fiscal and policy measures could still force the hand of the central bank.
Finance minister Pranab Mukherjee said he is confident that the range of inflation will be 6.5-7.5% throughout the year. “I hope if (the) monsoon is quite good, then it would be possible that this type of pressures would be sorted out,” he added.
Food inflation, which has been in double digits since March this year, rose to 10.74% in May against 10.49% in April, mostly due to higher prices of pulses and vegetables. Fuel prices, on the other hand, were up 11.53%, reflecting the impact of the recent hike in petrol prices. Core inflation, or inflation in non-food manufactured goods, picked up marginally in May to 4.9%.
The government on Thursday sharply raised the minimum support price for paddy, oilseeds and pulses, which is further expected to stoke food inflation. Retail inflation at the all-India level has already crossed the double digit-mark at 10.36% in April.
Yes Bank Ltd chief economist Shubhada Rao said that though prima facie data on core inflation is comforting, a closer look at the seasonally adjusted numbers alters the picture. “In the coming months, as (a) favourable base effect wanes, core inflation is likely to move above 5% level,” he said.
The provisional inflation data for March was revised sharply by 0.8 percentage point to 7.69% from 6.89% estimated earlier, raising apprehensions for similar large-scale revisions in April and May data.
Rajeev Malik, senior economist at CLSA Singapore, said RBI needs to appreciate that India is in an abnormal cycle in which rate cuts cannot address growth pangs.
Alluding to the policy paralysis in government, Crisil chief economist D.K. Joshi agreed with Malik. “Interest rate cuts cannot be the buffer against falling growth,” he said, pointing out the need for coordinated action by the government.
Besieged by corruption scandals, hamstrung by in-fighting, and under pressure from coalition partners and opposition parties, the government has put on hold reforms such as allowing foreign investment in multi-brand retail. Less politically sensitive measures such as allowing foreign airlines to buy stakes in domestic carriers have also not seen any progress. Key economic legislation such as the Direct Taxes Code and the goods and services tax are also on hold. The government has also not been able to raise diesel and cooking gas prices for a year.
The preparation for presidential polls next month has only shifted the government’s focus away from key policy issues.