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There is a rare consensus among policymakers, academia, industry and policy institutions that 6-8% inflation is here to stay. There is also an emerging consensus that growth this year will be in the 7.5-8.5% range.
As of now, it appears that there are only two organisations left who still believe that 8.5%-plus growth is possible this year: the CMIE and Indicus!
What is it about the data that indicates continued positive momentum in the economy? First and foremost is demand — despite rate hikes, most sectors are seeing increase in orders — credit offtake is much higher than last year — April commercial bank credit rose 22.1% year-onyear compared to 17.1% last year — and we have had two strong farm seasons for the last two years and it appears this year would be good as well. Confidence is still strong: the CII Business Confidence Survey shows that investment plans are unaffected across most sectors, with spending on capital expansion high on the agenda. The Indicus MSME Business Confidence Survey, part supported by Sidbi, also shows optimism about growth this year. As for inflation, primary product inflation is trending down and manufactured items are set to stabilise in the 6-7.5% range over the next few months.
Despite all these positives, manufacturing growth has been falling for four quarters, rates have been rising rapidly and — with a more aggressive RBI — are expected to continue to rise in the coming quarters. There has also been a continued fall in investment, with the last quarter showing just a 0.37% growth in gross fixed capital formation over the last year.
Most important, the government seems to have decided to do only the bare minimum that is expected of it — economic reforms will have to wait for some other time. Instead, the government is spending more time in instituting new welfare schemes, changing poverty definitions and arguing with civil society about corruption. The sweet spot right after many election victories is now getting over and almost no growth or efficiency-enhancing decisions have been taken. The UPA government that started off with the cream of reformers, it seems, has only one potential reformer left: Pranab Mukherjee. But even he is unable to push through what he knows is needed: raise petroproduct prices or risk the bankruptcy of the best of his navratnas. The rest are busy claiming that FDI in retail will ensure lower inflation. Actually, it won’t — for that to happen, lots more is needed. The agriculture market is highly fractured, its fissures are the result of badly-thought-through regulations and laws. The government and just about each of its advisers knows this very well, but is powerless or unwilling to change. Moreover, the reforms are in name only: four months of rising crude oil price did not automatically lead to a hike in the socalled decontrolled petrol price.
Non-farm commodity inflation can be partly addressed by enabling the mining and basic industry projects, most of which are delayed because of the trust deficit. Nobody these days believes that rehabilitation norms would be followed or compensation would be adequate, or, for that matter, environmental damage would be minimised. Consequently, mining and basic industrial projects are stuck. The trust deficit vis-à-vis the government’s ability to adequately regulate has finally translated into a production-andsupply deficit. Meanwhile, wage inflation is again roaring; though this time, even the lower-end human capital is benefiting, capacities and capabilities in vocational training still lag demand.
FDI in retail will not take care of this core problem: the policymakers’ inability to reform. It appears that the RBI knows this, rate hikes purportedly aimed at cooling inflation are actually aimed at cooling demand-led growth. India is well on its way to giving up the 8.5-9.5% growth that it could achieve with little effort, and will have to settle for 7.5-8.5%.