Economy in pain,as data shows few gains

In fact,the IMF estimates predicts that Indias fiscal deficit,at 8.9 per cent of GDP,will be the second highest among the major advanced and emerging markets,behind Japans.

Its certainly not a pretty picture on the economy front.

Early this week,the International Monetary Fund pruned its growth forecast for the Indian economy to 6.1 per cent from the earlier estimate of 6.8 per cent,the same day the RBI Governor said that inflation,despite slipping to its lowest level in five months in June,continues to stay well above the central banks comfort zone. Corroborating this,the Consumer Price Index numbers for June released on Wednesday,while easing a bit to 10.02 per cent from Mays 10.36 per cent,indicated that the worst is still not over.

In fact,the steady stream of data coming in from the government including last weeks IIP and Mondays inflation WPI estimates along with the quarterly numbers from corporate India clearly points to one thing for sure. That growth is waning further and ebbing investor sentiment is unlikely to rekindle anytime soon. Worrying still is that data in the IMFs Fiscal Monitor Update for July 2012 projects that Indias overall fiscal deficit including the state deficits as a percentage of gross domestic product GDP,will be much higher than that of Greece,Portugal,Spain or Ireland this year.

In fact,the IMF estimates predicts that Indias fiscal deficit,at 8.9 per cent of GDP,will be the second highest among the major advanced and emerging markets,behind Japans.

In 2013,the IMF expects Japans fiscal balance to improve,while it does not expect to see much progress in India,with the result that India could find itself right on top among all major world economies on this benchmark. So the combination of a high deficit,continuing high inflation and low growth threatens policy makers on the future course of action. Businesses want lower interest rates to help drag the economy back from a nine-year low of 5.3 per cent GDP growth in the first quarter of 2012. But the RBI looks unlikely to oblige,especially as a faltering monsoon,key to volatile food prices,means fiscal deficit could spiral again as the government rolls out anti-drought measures.

So instead of the RBI,it is the government which holds the cue on rate cuts. A spend on drought will mean inflation will continue to be high as Indias most stubborn macroeconomic problem and keeps the countrys interest rates higher than most other major economies. So managing the deficit remains central to curbing inflation in the medium-to-long term,coming in the wake of subdued investment inflows into the country. While recent policy support,such as a hike in FII investment quota in bonds and easing of ECB norms,could offer pockets of support over the medium term,the inflows still remain a concern and will be determined to a great extent by international liquidity and risk sentiment,which are likely to remain uncertain in the near term.