A comfortable inflation and a slow recovery in growth are strong factors that warrant both fiscal and monetary accommodation. (Naveen Kumar Saini/Mint)
A comfortable inflation and a slow recovery in growth are strong factors that warrant both fiscal and monetary accommodation. (Naveen Kumar Saini/Mint)

Indian Economy badly needs monetary policy help before Elections 2019

  • ...for three reasons: industrial production continues to lag, outlook on capex isn’t optimistic and inflation remains low
  • A private survey shows companies are planning to curb outlays on hiring and capital expenditure

Policymakers have got three reasons to vote for monetary accommodation as India goes to polls next month.

The latest macroeconomic data shows that industrial output continues to lag, outlook on capital spending is far from optimistic, and retail inflation remains low.

In short, the Indian economy is still hankering for more fiscal and monetary help. However, the forthcoming elections would mean that government expenditure would be restricted until a new government comes to rule. Monetary policy help is the only kind the economy can expect in the interim.

Industrial output growth came in low at 1.7% for January, down from 2.4% the previous month. This was expected because of the effect of an adverse base, as the growth in January last year was a healthy 7.5%.

Even so, the fact that industrial output growth has slipped for three months in a row now shows that manufacturing hasn’t really strengthened. Furthermore, economic growth in the fourth quarter is expected to fall and the industrial output growth underscores such expectations.

While existing conditions are still benign, the outlook for growth isn’t optimistic.

IHS Markit’s India Business Outlook survey showed that Indian companies plan to curb their outlays on hiring and capital expenditure.

The survey detailed that the private sector confidence level in February was at its lowest in a year. Besides, Indian businessmen are the least upbeat about prospects among their emerging market counterparts.

Ambiguity around the general elections is often cited as a hurdle to fresh investments, especially by companies. However, past data indicates that even after the polls overall capex does not necessarily revive and even when it does the improvement isn’t sharp.

Meanwhile, retail inflation climbed to 2.57% in February, up from 1.97% the previous month.

While the rise is sharp, retail inflation is still within the Reserve Bank of India’s 4% target. Also, the rise is driven by food, as deflation in food items has reduced. This too was largely expected. The surge in health and education inflation in January, which had worried economists, has slowed.

A comfortable inflation and a slow recovery in growth are strong factors that warrant both fiscal and monetary accommodation.

Ergo, monetary help would be opportune and the central bank has already indicated it is inclined to help fire up the Indian economy. Therefore, a cut of 25 basis points in policy rates looks like a done deal.

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