Two sets of data released by the Central Statistics Office (CSO) on Wednesday confirm the worst fears about the current health of the Indian economy. The first has to do with industrial growth, which, at 1.7 per cent in May, was even below the 2.8 per cent year-on-year figure for the previous month. Even more revealing is production of capital goods — a proxy for investment activity — where the growth numbers stood at minus 2.9 per cent in April and minus 3.9 per cent in May. And all this comes on top of GDP growth, which has been falling for the past five successive quarters from January-March 2016 to January-March 2017. The latest industrial output data for April-May points to the possibility of a sixth consecutive quarter of decline. If the likely disruption from the GST, even if temporary, is also factored in, that could well translate into the seventh in a row.
This clear evidence of slowdown is reinforced by the latest CSO data on consumer price inflation, which has eased to a record low of 1.5 per cent in June. True, this has been largely on account of retail food prices falling 2.1 per cent. But even “core” inflation — price increase stripped of its volatile food and fuel components — is now down to 3.9 per cent. That, and overall retail inflation ruling below the Reserve Bank of India’s (RBI) medium-term target of 4 per cent for the last eight months, is proof of entrenched disinflationary pressures in the economy. We may not be in deflation territory yet, though price declines are noticeable today in many sectors from agriculture to real estate. The chief economic advisor, Arvind Subramanian, is probably right in noting that there is a “paradigm shift” to low levels of inflation. This is something the RBI, in particular, may not be picking, given how the central bank has been consistently “overachieving” its inflation forecasts in the last many months. The case for a sharp cut — at least 0.5 percentage points — in the RBI’s “repo” or overnight lending rate cannot be stronger today.
The gloomy short-term outlook for the economy shouldn’t, however, take away from the many positives that should yields results a few quarters from now. The GST will result in a substantial lowering of transaction and logistics costs, apart from providing a much-needed boost to formalisation and tax compliance. The implementation of the newly enacted insolvency and bankruptcy law will have a similar impact, in terms of improving the overall ease of doing business in India. But the economy needs a booster shot in the immediate run as well — in the form of lower interest rates, which will do more good than harm.