Express view on Indian economy: On the upswing

Data released by the National Statistical Office on Monday points towards an improving macroeconomic environment — inflation is down, industrial production is up. Headline retail inflation, as measured by the consumer price index, fell to 4.25 per cent in May, aided in part by the base effect. Inflation is now only marginally above the central bank’s target. Alongside, the index of industrial production rose to 4.2 per cent in April, with manufacturing growing at 4.9 per cent. Industrial production has now averaged 4.4 per cent since January this year. These are encouraging signs.

The disaggregated data shows that food inflation fell to 2.91 per cent in May, down from 3.84 per cent in the month before. The decline was driven by vegetables, oil and fats, and meat and fish. However, pressure points such as cereals and milk and milk products remain. In the non-food and fuel category, inflation remains elevated in segments such as clothing and footwear, household goods and services and personal care effects. Taking this reading into consideration, inflation has now averaged 4.5 per cent in the first quarter so far (April-May). This is marginally lower than the RBI’s estimate of 4.6 per cent, released in the June meeting of the monetary policy committee. However, as the base effect fades, inflation is likely to edge upwards over the coming months. The RBI expects it to rise to 5.2 per cent in the second quarter, and 5.4 per cent in the third quarter. There remains considerable uncertainty over how the monsoon plays out and its impact on food prices — rainfall has so far been deficient. This reduces the possibility of any move by the MPC until greater clarity over the trajectory of inflation emerges.

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The segment-wise data from the index of industrial production shows that consumer durables continue to fare poorly. The segment has contracted since December last year suggesting that demand remains under pressure. On the other hand, even though growth in the capital goods segment has slowed down in April, over the past four months, the segment has averaged around 9 per cent.

Similarly, the infrastructure/construction goods segment has averaged almost 10 per cent over the same period. These are healthy signs. Recently released data on indicators such as the purchasing managers indices also points towards a healthy economic momentum — the manufacturing PMI touched 58.7 in May, while the services PMI stood at 61.2 in the same month. Others, such as domestic air passenger traffic, are also showing strong growth. In the last MPC meeting, the RBI had retained its growth forecast for the year at 6.5 per cent. However, considering the effects of tighter global and domestic monetary policy, and uncertainty over the monsoon, there are downside risks to this growth forecast.