Official data on the consumer price and industrial production indices released on Monday confirm one thing: Inflationary pressures are clearly receding, while we are yet to see convincing signs of a manufacturing or investment recovery. At 5 per cent in December, annual CPI inflation has, for a third consecutive month, been well below the RBI’s January 2016 target of 6 per cent. Equally revealing is the CPI itself declining 0.4 per cent month-on-month in December. That, in combination with rural wages posting a near-decade-low growth of 3.8 per cent in November and retail food inflation ruling below 4.8 per cent despite a poor agricultural year, is proof enough of a weakening underlying inflationary trend in the economy. Falling global oil and other commodity prices will, of course, only aid this process further.
The same cannot be said, however, of industrial output. True, overall year-on-year growth at 3.8 per cent in November is better than the minus 4.2 per cent rate for the previous month. But one month’s numbers, that too far from spectacular, hardly constitute evidence of a rebound or nascent recovery. If anything, it is the 14.5 per cent negative growth in consumer durables production — minus 15.9 per cent for the entire April-November period — that is more striking. It points to fragile consumer sentiment, which is a result of the not-so-encouraging outlook for jobs and incomes. Equally revealing is the data on industrial entrepreneurs’ memoranda (IEMs) filed with the government’s Secretariat for Industrial Assistance. Only 127 IEMs with proposed investments of Rs 16,599 crore were filed in November, against the corresponding figures of 159 and Rs 31,365 crore for the same month in 2013. Simply put, both consumers and corporates are spending less, be it on white goods or on plant and machinery.
The message to the RBI is unambiguous: it is time for the focus of monetary policy to shift to growth. We don’t need any more corroboration of inflation coming under control. Bringing down policy interest rates isn’t going to cause any harm, whereas putting it off would inflict irreversible damage on investor sentiment. The RBI may claim that interest costs aren’t a deterrent to investments as they form an insignificant part of the total expenditures or sales of companies. Well, interest rates may not matter by themselves. But they matter for “sentiment”, which is what ultimately drives investment. And that is needed more than ever today.