Recovery and policy dilemmas

Recovery and policy dilemmas

There is no doubt that green shoots are here to stay. The Index of Industrial Production (IIP) numbers for August, when seen in light with those for June and July, tell a story of recovery. At 10.4%, the increase in the overall index in August, on a year-on-year (y-o-y) basis, leaves little room for doubt. What is heartening in the IIP data is that manufacturing, which accounts for almost 80% of the index, clocked a double-digit growth of 10.2% y-o-y for the first time this fiscal year. Electricity grew at 10.6% y-o-y, compared with 0.8% in August 2008, and mining also rose at a healthy 12.9%, compared with 2.8% during the same period last year.

In addition, 14 out of the 17 industry groups have exhibited good growth in August compared with the corresponding month of the previous year.

If these figures make cheerful reading, they also make policymaking difficult. When read along with the rises in the Wholesale Price Index, they make for difficult choices. On the one hand, there are undoubted inflationary pressures in the economy: food articles inflation is close to 15% and, given the combination of drought and floods in succession in different parts of the country, these prices have the potential to harden.

On the other hand, any tightening at this stage can kill growth. Export-oriented goods such as textile products and wool, silk and manmade fibre textiles have grown by 16.4% and 15.7%, respectively, in August. These sectors are sure to be affected by a premature exit. There is also a question mark over what the Reserve Bank of India can do to tame food inflation, where non-monetary factors are at work as well.

At the moment, there is a continued spurt in the growth of consumer durables—something that has been going on since the beginning of the fiscal year. First, the Sixth Pay Commission award, and now, demand due to the festival season have spurred this.

This leaves the question of an exit policy difficult to answer. There is no doubt such a step will have to be taken soon, as adverse macroeconomic consequences will follow if this is not done. But this is not the appropriate time. A better time to make that call would be the end of this year, when more data will be available and the picture is more clear.

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