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Low industrial production and high inflation are reasons to focus on fiscal correction, skirt populism
From the point of view of investments, the fourth quarter tends to perform better than the preceding three quarters in the Indian economy. It is possible, therefore, that the sustained downward movement in the index of industrial production, which has reached 0.7 per cent for the April-December period of this fiscal, could improve somewhat in the last three months. Even with the improvement, however, achieving the growth target for this fiscal will remain difficult. For instance, as per the latest data released by the government on Tuesday, the mining sector has contracted by 1.9 per cent. To ensure the 0.4 per cent growth estimate for the April-March period, the sector will have to expand by 6.4 per cent, January to March 2013. The backlog for manufacturing looks less daunting, which must expand by 5.3 per cent in each of the three remaining months.
Figures showing sluggish industrial behaviour present more of a worry when juxtaposed with the retail inflation numbers, also released on Tuesday. With the RBI projecting a rise in the price levels for the December-January period, the spike was not entirely unexpected. Retail inflation in India tends to peak around these months. The area of concern is a higher rate of inflation in rural areas, at 10.88 per cent, even as urban inflation is not rising at the same pace. This inflation cannot be entirely accounted for by the rise in fuel prices. Whatever be the proximate causes, the combination of low industrial growth and high inflation makes policy prescription tricky.
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