Monday, October 15, 2012

Indian government unveils policy basket to counter staggering growth and downgrade risks

India’s slowing growth turned from a threat to reality with India recording the worst first quarter growth in a decade, with no significant improvement in available second quarter numbers for industrial output. Growth forecasts have thus been lowered by every agency making such projections; the lowest being that by IMF at below 5% for the year 2012. Even as threats of rating downgrades were dismissed by some as of no consequence, the fact remains that our financial markets are driven by FII sentiments and many of these entities are barred from investing in junk rated countries. The Indian government has now responded with a basket of measures which not only boosts market sentiment, but if implemented could go a long way in boosting longer term capital inflows and tackling domestic issues such as supply-constraint driven inflation and the clearing of infrastructure bottlenecks.  In a string of bold initiatives to revive economic growth, the central government, first announced Rs 5 per litre increase in the regulated diesel prices and a cap on subsided cooking gas usage. It later withdrew customs and excise duties on non-subsidised LPG cylinders, a move that will help bring their prices down. The government followed up these measures with a liberalisation of foreign holding caps in the aviation, multi-brand retail, non-news broadcast media and power exchanges. Multinational retailers can invest up to 51% to open stores in states and UTs which agree to implement the decision. Minimum amount to be brought in by the foreign investor would be USD 100 million and outlets may be set up only in cities with a population of more than 10 lakh. At least 50% of FDI should be invested in 'back-end infrastructure' within three years of the first tranche. FDI in multi-brand retail, once strongly in motion, is expected to bring about significant improvements in agricultural warehousing and supply-chains.

The government also announced a plan to divest its stake in five companies. The rate of withholding tax on overseas borrowings has been reduced to 5% from 20%. The lower rate will be applicable for overseas borrowings made after July 1, 2012 and before July 1, 2015. Borrowings under a loan agreement or by way of issue of long-term infrastructure bonds that comply with External Commercial Borrowings regulations as administered by the RBI would be eligible for benefits of the concessional tax regime. The RGESS an initiative intended to support first-time equity investors not only expects to promote a ‘equity culture’ in India and discourage investments in gold, but also aims to revive the mutual fund industry, which has now been included in the scheme along with exchange traded funds.

The government set in motion a second wave of reforms, approving proposals allowing foreign investors to own up to 49% in insurance firms and pension funds. Signaling the government's intent to continue with reforms to boost economic growth and investor sentiment, the Cabinet cleared all amendments to the insurance bill. The cabinet also cleared the Pensions Bill and allowed FDI in Pension Funds. It also took the cap in the pension sector to 49 per cent following the insurance sector. The proposed changes to both the bills will now have to be cleared by both houses of the Parliament before they can come into effect. Till now, 26 per cent FDI was allowed in the insurance sector while the pensions business was closed to foreign investment. Looking to better serve the interests of all stakeholders, the government approved amendments to Companies Bill 2011, including changes related to spending on CSR activities. The proposed legislation will bring the law on the subject of corporate functioning and regulation in tune with the global best practices so that there is further improvement in corporate governance in the country through enhanced accountability and transparency. A provision has been introduced to make expenditure on Corporate Social Responsibility (CSR) mandatory. Giving a reform boost to commodity markets, the government approved the FCRA Bill that seeks to provide more powers to the regulator Forward Markets Commission (FMC) and allow a new category of products and to facilitate entry of institutional investors.

A segment within the government has been leaning towards cash transfers to poor households as the way out to deal with an unwieldy subsidy bill estimated at Rs 2.5 trillion (on three major subsidies—food, fuel and fertilizer). The government is set to step up its push for cash transfer of subsidies with two pilot projects validating the assumption that it would lead to significant savings for the government while enhancing benefits for users.

Get regular updates on Growth, Inflation and other Indian & Global Macro-Financial indicators/data with E-UpDates—A Monthly Statistical Bulletin by Ecofin-Surge.

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Monday, September 3, 2012

Challenges for India’s policymakers on the rise as India records worst 1st quarter growth in a decade and key debt and deficit indicators rise

Robust growth by construction, real estate and financial business services, which together account for 27% of the GDP, along with a 2.9% growth in agriculture took India’s Q1 2012-13 growth to 5.5%, even as the manufacturing sector slowed to a near-zero (0.2%) growth. All three critical drivers of growth, namely, private consumption, investment and exports continued to slow. The decline in the growth of fixed investment to 0.7% in Q1 of 2012-13 as against 14.7% in Q1 of 2011-12 is the major source of concern, as it indicates further deceleration in growth going forward. While the high rate of growth (10.9%) of construction is on a low base (3.5% in Q1 last fiscal), the 'financing, insurance, real estate and business services' sectors together grew 10.8%, even on a high base of 9.4%. The 'trade, hotels, transport and communications' sectors witnessed just 4% growth, owing partly to a high base effect (13.8% in Q1 of the last fiscal). Overall, services output slowed sharply to 6.9% in Q1 from 7.9% in the previous quarter, reflecting the lagged adverse effects of the industrial slowdown on the services sector. A survey by the central bank has shown that estimated total fixed investment by large firms in new projects which were sanctioned financial assistance nearly halved during 2011-12 indicating further slowdown in economic activity and job creation.

Slowing growth is taking its toll on revenues while government was unable to rein in its expenditure: fiscal deficit during April-July reached Rs 2.64 billion or 51% of the budgeted estimate of Rs.5.1 billion, raising fears of the government breaching its fiscal deficit target of 5.1% of GDP for the current fiscal. Government's total receipts in the first four months of the fiscal was at Rs. 1.73 billion, just 17.7% of the budgeted amount, while its expenditure climbed to Rs. 4.37 billion, or 29.3% of the budgeted amount. With increasing recourse to debt flows and drawdown of reserves to finance the CAD, various external sector vulnerability indicators showed considerable deterioration during 2011-12. The central bank’s report on India’s external debt showed that reserve cover of imports, the ratio of short-term debt to total external debt, the ratio of foreign exchange reserves to total debt, and the debt service ratio deteriorated during the financial year. On the positive side the share of government (external) debt has gone down and the country remains in a comfortable position with regard to short term debt and the debt service ratio relative to other indebted countries.  

Get regular updates on Growth, Inflation and other Indian & Global Macro-Financial indicators/data with E-UpDates—A Monthly Statistical Bulletin by Ecofin-Surge.

Tuesday, June 19, 2012

What has changed Between Then and Now*?

Since 2011, we are faced with a situation where most analysts have come to agree that Europe needs fiscal integration with a fiscal authority and banking integration, a banking union with eurobonds, a banking supervisor and a European guaranteed deposit fund. Most agree even more that European deposit insurance and debt mutualisation are not optional; they are essential to avoid an irreversible disintegration of Europe’s monetary union as the ERF is a temporary programme that does not lead to permanent euro zone bonds. The main problem remains that any proposal acceptable to Germany could imply a significant loss of sovereignty over fiscal policy for the periphery, particularly Italy and Spain. On the other hand, German concerns about the moral hazard of risking German taxpayers’ money will indeed be hard to justify if meaningful reforms do not materialise in the periphery. But such reforms do take time and the human costs being inflicted in the process are turning out to be more than significant.

Coming Home, the headline figures for economic growth in India have been revised downwards; despite putting in place policy measures that have choked domestic demand and hence growth, prices continue to rise; government spending continues to grow faster than tax revenues, private and foreign investment have slowed down and the rupee has been devalued sharply by market forces, with the rupee hitting an all-time low against the dollar in late-May. Every discussion on the Indian economy centres around the need for filling chronic gaps in areas like infrastructure, skilled labour and productive farming, or on the inefficiency of the system of subsidies. Yet the government remains undecided on crucial issues like removing certain barriers to investment that could put growth back on track, while the central bank is circumstantially forced to remain hawkish in stance even though the latest numbers on growth and inflation increasingly have a stagflationary ring. Yes even in India there is a human cost involved in achieving a 6% vs a 9% growth, which may go un-noticed as the notional loss of being able to change the lives of several waiting to be pulled out of poverty and unemployment.

Missing is the swift and almost unanimous decisions taken by policy makers/implementers through the globe and missing is the flurry of actions taken to stem the Meltdown of 2008. As Time Slips By policy implementers are bent on Defying Gravity and say they are In Control and keep waiting for the Panic Attack. We are left to be Saved By A Miracle, wondering what has changed Between Then and Now? While they found institutions too big to fail they are not so unwilling to fail the very people for whom the institutions supposedly are set up. When would the time be right to come out of the moralistic view on the burden of future generations and look to the sufferings of the present one? If I Could I would be a Time Traveller to Check It Out if ignoring the Echoes and Shadows of Yesterday did we walk Into The Sunset or did we win our Race With Destiny.

(* a la Vinnie Moore)
Get regular updates on Growth, Inflation and other Indian & Global Macro-Financial indicators/data with E-UpDates—A Monthly Statistical Bulletin by Ecofin-Surge.

Sunday, April 29, 2012

RBI Makes a Move—Will the Government Reposition?

Surprising analysts and the market alike, the RBI reduced its key policy rate, the repo rate under the LAF, by a higher than expected 50 basis points to 8%. If the Government in turn can make a quick move to push forward important reforms measures, together it can provide tremendous boost to India’s wilting economy hurt by weak global growth. RBI’s decision could have been guided by the fact that India's industrial output not only rose a much slower-than expected 4.1% in February, the January figure was sharply revised downwards to a growth of 1.14% from 6.8% announced earlier.

CRR has been left unchanged at 4.75% against expectation of a reduction, instead liquidity cushion has been provided by raising the borrowing limit of banks under the marginal standing facility (MSF) from 1% to 2% of their NDTL outstanding; the MSF rate, determined with a spread of 100 basis points above the repo rate, stands at 9%. Liquidity in the system has improved since end-March with daily average borrowings by banks under the LAF averaging less than rupees one trillion in April as compared with Rs1.9 trillion in end-March.  Interest rates on short-term monetary market instruments such as commercial papers and certificates of deposits as well as 91-day treasury bills have come down in April, but the stiff long-term rates signal that the outlook on interest rates is not benign and market participants are betting on a rise in rates. Banks have already started passing on the reduced rates to their borrowers, while some banks with strong deposit bases have also reduced the rates offered on deposits. RBI’s stance however, remains hawkish; in terms of bias or guidance, the RBI has clearly indicated that headroom for further rate reduction remains limited given the upside risks to inflation in the near-to-medium term. In this situation it is now clearly the Government’s turn to show some progress in its multi-pronged reforms agenda put forward in the Union Budget, before the positive effects of the central bank’s rate cut wear off.    

The highlights of the RBI’s Annual Monetary Policy for 2012-13 will be presented in the May 2012 issue of E-UpDates, Ecofin’s Monthly Statistical Bulletin.

Monday, March 19, 2012

Some Facets of India’s Union Budget for 2012-13

The budget mostly promised to reduce the nation’s fiscal deficit and rein in costly subsidies and bring in critical reforms, but for the moment given the political situation garnering the necessary revenue has been done through increases in indirect taxation. Though allocation to critical sectors has been increased there is no immediate focus on putting the economy on a high growth trajectory.

Some Measures and Effects: Tax burden for individuals to come down slightly; income tax exemption limit has been raised. Small savers to benefit from exemptions for investments in equity and bank fixed deposits up to a limit. Inflationary in the short-run; no change in corporate tax rate, but standard rate of excise duty, as also service tax rates, raised from 10 per cent to 12 %. Capital markets get a boost; securities transaction tax (STT) on cash delivery reduced by 25 % to 0.1 %. A new equity saving scheme to allow income tax deduction to small retail investors in stocks. Corporate debt market has been opened up for qualified foreign investors (QFIIs). Provision for re-capitalising public sector banks and FIs. To tackle slowdown and supply-side bottlenecks; additional capital has been provisioned to boost agriculture, agricultural research, fertilizer industry, irrigation, infrastructure and energy. External commercial borrowing has been allowed in sectors like airlines, power projects and low-cost housing. Tax relief for stressed sectors; agriculture, infrastructure, mining, railways, roads, civil aviation, manufacturing, health and nutrition, and environment have been provided with duty relief. Social sector is a focal point; higher allocation for education, health and financial inclusion. Several legislative reforms have also been proposed in the budget. The cut down in oil subsidy bill shows intentions of increased oil-price pass-throughs.

Some Budget Numbers: Total expenditure in 2012-13 seen to be up by 29 %. Gross Tax Receipts estimated at 15.6 per cent higher than original budget estimates and 19.5 per cent over the revised estimates for 2011-12. Fiscal deficit targeted at 5.1 per cent of GDP in 2012-13, to be reduced from 5.9 per cent in 2011-12. Aim to keep subsidies under 2 % of GDP in 2012-13. Central Government debt is at 45.5 per cent of GDP.

Some Hidden Numbers: Revenue foregone on custom duties constitute over 40% of total revenue foregone on account of exemptions and special rates; the items which account for the major amount of customs duty foregone are Gold & Diamonds (mainly for export promotion) followed by Crude & Mineral Oils, which together with Fertilisers make up of almost 25% of customs duty foregone. Revenues foregone for customs and excise duties are nearly 150% of revenue collections on those accounts. With corporate tax rate held at 30%, effective tax rates for corporates have risen from around 20% in 2006-07 to 24.1% in 2010-11, due to phasing out of exemptions.

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Monday, March 12, 2012

January’s sharp gain in IIP—more of a pointer to ill-health?

January’s IIP has beaten all expectations, growing at 6.8 per cent compared with December’s tepid 1.8 per cent, and driven by the manufacturing sector growing at 8.5 per cent. However, a closer look does not speak too well about fundamentals. In terms of industries, just thirteen out of the twenty two industry groups (as per 2-digit NIC-2004) in the manufacturing sector have shown positive growth during the month of January 2012. Categories that are pointers to the health of the economy such as capital goods, intermediate goods and consumer durables have all registered negative numbers. A huge 42 per cent gain in consumer non-durables is primarily powered by chewing tobacco! It is time for policy makers to undertake a more careful diagnosis of the health of the economy.

Get regular updates on Inflation and other Indian & Global Macro-Financial indicators/data with E-UpDates—A Monthly Statistical Bulletin by Ecofin-Surge.

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Monday, February 13, 2012

Some disconcerting facts surrounding India’s slowing growth...

The advance estimate of national income for 2011-12, released recently by the Central Statistical Organisation, points to a decline in India’s GDP growth rate, from 8.4 per cent last year, to 6.9 per this fiscal. Hurt by high inflation and decline in demand in interest-sensitive sectors, private final consumption expenditure, the largest component of aggregate demand, is expected to moderate to 6.5 per cent in 2011-12 from 8.1 per cent in 2010-11. Pace of capital formation is also expected to slip to crisis levels of 5.6 per cent. Indeed, even the latest industrial production figures with a meager 1.8 per cent growth for December, confirm the slowdown, with a worrisome de-growth of -16.5 per cent in the capital goods sector. While such moderation can in principle be tackled through demand augmenting policies, it leads to a strong possibility of reemergence of inflationary pressures once pent up demand from both consumers and industry show up. The service sector has again emerged as the prime mover; all the three broad groups under which the tertiary sector is classified in the national accounts statistics — trade, hotels, etc; finance, insurance etc; and community, social and personal services — are instrumental in pulling the real GDP up. Deceleration in the manufacturing and agricultural sectors, combined with a services sector growth is definitely inflationary. GDP deflator, a broad measure of inflation that includes services, has been estimated at 8.66 per cent, higher than the government/RBI’s estimate of 7 per cent WPI inflation by the end of March. Global food prices as per the FAO rose 1.9 per cent in January demonstrating the volatility in the international food markets; worries about weather conditions affecting 2012 crops in several major producing regions point to a further increase in February. Back home the agriculture, forestry and fishing sector is expected to record growth of just 2.5 per cent in its GDP during 2011-12, as against the previous year’s growth rate of 7.0 per cent. Within agriculture, the value of food grains production is expected to slow to 2.3 per cent as compared to 12.2 per cent in the previous agriculture year despite a record harvest of foodgrains, with new peaks in both rice and wheat production. This does not augur well for the supply-side. The Indian central bank has battled inflation through a high interest rate policy during the past fiscal and does not have much fire power left this time to tackle another surge in prices; indeed its rate reversal cycle may coincide with another bout of high global food price inflation. A production augmenting budget (and central bank policy) even if inflationary, is necessary for longer term development; this has to be backed-up by extremely prudent rationalisation and channelisation of subsidies to achieve the dual objectives of fiscal consolidation as well equitable distribution.

Thursday, January 26, 2012

RBI addresses liquidity concerns; keeps key policy rates and inflationary expectations firmly anchored

Responding to an acute and prolonged liquidity crunch, the RBI in its recent Review of Monetary Policy has reduced the CRR (Cash Reserve Ratio, the amount of cash that banks have to mandatorily park with it) by 50 basis points from 6 per cent to 5.50 per cent of deposits, infusing about Rs. 32,000 crore into the banking system to mitigate the effects of net liquidity drainage from the system. For the last 4-5 months, commercial banks put together were borrowing Rs. 1-1.5 lakh crores on a daily basis from RBI. Since mid-October 2011, pressures on liquidity were acute despite injection of liquidity worth Rs. 70,000 crore, exacerbated by the forex market operations conducted by the Reserve Bank in response to a sharp depreciation of the Indian currency. This is indeed a reversal of the central bank’s policy stance as RBI notes that it considers the CRR as a monetary policy instrument with liquidity dimensions. However, RBI held its key policy rates unchanged (Repo: 8.5%, Reverse Repo 7.5% and MSF at 9.5%; SLR at 24.0%).

The country’s central bank’s decision making has turned even more challenging in recent months as the global economic scenario has worsened with Europe’s debt crisis pulling down growth and trade estimates across the globe. India’s domestic investment has also been on a downturn posing risk to future growth and has partially showed up in latest GDP as well as IIP numbers, leading to significant lowering of growth forecasts; the RBI has also slashed its growth forecast for the current fiscal from 7.6 per cent predicted in October to 7 per cent. Price pressures on the other hand have shown signs of moderating with lower pace of increase in the WPI in recent months, lower financial year build-up of inflation and dampening month-over-month seasonally adjusted annualised (3 month moving average) rate of inflation. However, the RBI’s commitment to a reversal in key policy rates is restricted by certain issues in inflation trends; the sharp decline in primary food inflation reflects high base and seasonal moderation together with moderation in global food prices with the FAO Food Price Index in December 2011 about 13 percent below its historical peak in February 2011. The RBI rightly feels that the comfort may fade fast if policy and administrative actions, which encourage investment that will help ease supply constraints in food and infrastructure, are not forthcoming and if the anticipated fiscal slippage, which is caused largely by high levels of consumption spending by the government and poses a significant threat to credible inflation management, is not adequately addressed.

RBI’s recent policy measure has been greeted well by markets, industry and analysts alike. Going forward, though the RBI’s bias is now stated to be doveish, the timing of the rate reversal cycle remains difficult to predict as it would clearly depend on inflationary trends; global inflation is likely to be moderating given the fiscal austerity driven demand deficiency around the globe, but domestic price pressures may yet resurge through either rupee depreciation, energy price pass-throughs or any expansionary (consumption demand augmenting) measures taken by the government without adequately addressing supply-side issues. The government’s response in the forthcoming budget is to be watched, however, whatever measures are announced would take some amount of time and will to execute. Thus the waiting and watching continues.

Tuesday, January 17, 2012

Industrial production numbers do a 180 degree...

Industrial production numbers do a 180 degree

India's industrial production growth rate was back in positive territory at 5.9 per cent yoy for November 2011 reversing the downtrend of the previous five months and rebounding from a 28-month low of -4.74 (revised from -5.09) per cent in the previous month. The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for November 2011, registered yoy growth rates of - 4.4%, 6.6% and 14.6% respectively. The cumulative growth in the three sectors during this fiscal, April-November, 2011-12 over the corresponding period of 2010-11 was -2.5%, 4.1% and 9.5% respectively; over April-November 2011, IIP grew 3.8 per cent, as compared with 8.4 per cent growth seen in the same period in the previous year. Growth has been broad-based in November as 17 of the 22 industry groups in the manufacturing sector showed positive growth during November 2011. The industry group ‘Publishing, printing & reproduction of recorded media’ showed the highest growth of 69.1%, followed by 41.8% in ‘Medical, precision & optical instruments, watches and clocks’ and 29.3% in ‘Food products and beverages’. On the other hand, the industry group ‘Electrical machinery & apparatus n.e.c.’ showed a negative growth of 38.7%. The rebound in IIP for November 2011 has been largely led by a sharp growth in consumer goods output, which recorded 13.1 per cent growth as against near stagnation in the previous month, however, on a very low base of 0.7 per cent growth in the previous year. Within the consumer goods space, consumer durables registered growth of 11.2 per cent compared with 7.2 per cent in November 2010. Consumer non-durables registered 14.8 per cent growth in November 2011 as against a decline of 4.4 per cent in the same month in the previous year. The manufacturing sector, which accounts for 75 per cent of the IIP, recorded 6.6 per cent growth in November 2011 against 6.5 per cent in the same month in the previous year and a negative growth of 6 per cent in October 2011. Capital goods output (a proxy for investment activity in the economy) fell 4.6 per cent in November 2011 compared to a 25.7 per cent growth in November 2010, however, a significant jump from the. 25.5 per cent fall in October 2011. Electricity generation recorded a strong growth of 14.6 per cent in November 2011 as compared to 5.6 per cent in the previous month and 4.6 per cent in the same month last year.

What other numbers say

Analysts and industrialists alike justifiably see the rebound in industrial growth as per November IIP figures to be driven by transient forces and stress that this recovery needs to be seen with caution as fundamental trends remain weak. Seasonal (festival) demand led inventory re-stocking, fluctuations in auto output and improvement in lead indicators had pointed towards a firmer production number, which has materialised but a moderation is expected given the overall slowdown in capital investment sentiment. According to data from the Centre for Monitoring Indian Economy (CMIE) new investment proposals in 2011 fell 45% to a five year low of 10.46 lakh crore, from 18.88 lakh crore a year earlier. According to a RBI study the overall performance of 2,643 select (non-government non-financial) listed companies showed some moderation during April-September 2011 wherein the sales grew by 20.8 per cent vis-à-vis 21.5 per cent during April-September 2010 and, growth in profits declined sharply as compared with the corresponding period of previous year largely on account of higher input costs and significant increase in interest payments. Profitability in terms of operating, gross and net margins contracted by 200, 140 and 190 basis points, respectively in the first half of 2011-12 over the corresponding period of the previous year. Interest burden of these companies increased by 5.0 percentage points due to a faster increase in interest outgo in comparison with gross profits. A study by CRISIL Research has revealed that the interest paying ability of 420 companies in the S&P CNX 500 Index (excluding BFSI and public sector oil marketing companies) has dipped to a five-year low. The median interest coverage ratio has fallen to 4.8 times in the July-September 2011 quarter against 7.8 times in July-September 2010; average interest coverage ratio for these companies in the past five years was 8.4 times. Overseas direct investments by Indian companies in the first nine months ended December of the current fiscal (2011-12) fell by 28.32 per cent to $25.25 billion as against $35.23 billion in the same period of last year, according to figures released by the RBI. As per the RBI figures, overseas FDI by Indian companies amounted to $33.89 billion in calendar 2011 as against $40.45 billion in 2010, indicating a decline of 16.2 per cent. Overseas investments by Indian companies stood at a one-year monthly low of $1.46 billion in December 2011; outbound FDI last month was almost 47 per cent less than the $2.74 billion in November 2011. Experts attributed the decline to the global economic slowdown and uncertainties surrounding funding of overseas investments. However, while Indian companies invested less abroad, the FDI inflows during the April-November period have risen to $22.83 billion compared with the FDI inflows of $19.43 billion in the last fiscal (2010-11). A report by research firm Venture Intelligence shows private equity firms made investments worth $10.11 billion in India during 2011 by way of 441 deals, compared to $8.1 billion through 362 deals in the previous year, taking their total investment over the past five years to about $47 billion. Interestingly, PE firms invested $2.68 billion into real estate firms during 2011, a 69 per cent jump vis-a-vis the year-ago period. PE investment in October-December, 2011, however, declined to about $1.4 billion across 105 deals from $1.8 billion across 88 transactions in the same period of 2010, largely due to economic uncertainty and the decline in equity markets. Rating agency Moody's Investor Services upgraded India's short-term foreign currency rating from 'speculative' to 'investment' grade. This has come in addition to last month's upgrade in the credit rating of government's bonds from 'speculative' to 'investment' grade. Thus, several other numbers swing between positive and negative for the Indian economy in the near term.

Inflation numbers on the positive side for now

Inflation numbers and inflationary expectations are now on the positive side; food inflation stayed in the negative for the second week running at -3.36 and -2.90 per cent in the last two weeks of December. WPI inflation, which has been softening over the past months, came down to a two year low of 7.47 per cent for December. However there is good reason to believe that as the high statistical base effect wears off, food inflation will jump back to levels of over 5% as major structural problems continue to persist; as the Planning Commission's principal adviser pointed out the structural issues that forced average food inflation to remain around 7% between 2004 and 2009 are yet to be addressed.

Non-traditional measures for revival?

It is difficult to single out the role of RBI’s 13 interest rates hikes in controlling inflation as this downtrend in inflation is concurrent with retreating global commodity prices. Thus the timing of the rate reversal cycle is likely to be delayed till March, till the time there is more clarity on the inflation trajectory. The problem with growth revival is the fact that with fiscal deficit slated to overshoot the target 4.6 per cent by about 100 basis points, there is little fiscal lee way available for sops to industry or exporters to counter the high interest rate regime which have put industry in stress. Thus a slew of innovative measures are likely to be adopted to build on the current spate of good economic numbers to revive the economy without raising fiscal deficit even further; if well thought out and executed these could indeed provide a stronger base for growth in the medium term.