(Published in The Tribune, December 20, 2014)
It is unbelievable that inflation about which we were so worried even a few months ago has come down to zero. For the last few years the monetary policy was all about controlling inflation for which interest rates were hiked umpteen times. Raghuram Rajan the RBI governor has maintained that the fear of high inflation has not yet disappeared completely. In November however,not only has the WPI has come down to zero but retail inflation indicated by The Consumer price Index also has retracted to 4.4 per cent. It should bring about much relief to the common man and woman because the real reason for the inflation coming down is a fall in vegetable prices and of course petroleum prices.
Food inflation has come down from 15.4 per cent in November 2013 to 3.1 per cent in November 2014. Vegetable prices came down by 28.6 per cent mainly because of onion prices. Overall food inflation in November was 0.6 per cent as compared to 19.7 per cent last year. It is creditable for the government to have been instrumental in an increase in the supply of vegetables which has contributed to the easing of inflation.
The main contributor however of lowering inflation is the fall in petroleum prices as a result of higher supply from the US and lower global demand in the face of the unwillingness on the part of Organization of the Petroleum exporting countries to cut supply. Yet there is little rejoicing that can be seen about the sudden and steep fall in inflation and already there is talk of deflation creeping up in the economy which is always a bad sign and will led to low profits, retrenchment and low demand. A lot of urging and nudging is going on to make RBI change its stance and lower interest rates. While it is not a panacea for triggering a higher level of growth, it would certainly help industrialists in undertaking new investments that could lead to enhanced competitiveness.
More worrisome according to some economists is the falling industrial growth which has shrunk by 4.4 per cent. Manufacturing growth whose component in the IIP is the highest at 75 per cent , fell by 7.6 per cent. Perhaps both factors –lack of new investment and slowing demand are at play in bringing down manufacturing growth even though export growth has risen in the last one month. It grew at 7.3 per cent in November but imports grew at 26.8 per cent . Gold imports rose by 500 per cent. Imports of coal also rose.
Demand comes both externally and internally. There is a slackening of internal demand also due to the long term inflationary trend and perhaps insecurity due to slow economic growth and lack of jobs for the youth. External demand has definitely slackened due to the stagnant growth in the EU and slow recovery in the US.
Manufacturing growth contributes most to creation of jobs and even though the IT sector is the fastest growing sector in the economy, its potential for job creation is low because it requires technical expertise and knowledge of English. Every year around 10 million people are entering the labour force, mostly young people. Unless manufacturing growth is faster, jobs will not be created. Today people are worried about job security even when they have jobs are reluctant to part with money for increasing demand for goods and services.
The common person is worried about health and education expenditure. High school and college fees and exorbitant rates of hospitalization are making everyone except the superrich cautious about spending. Fear of resurgent inflation is also there at the back of people’s minds.
People are however spending on gold which also shows their lack of confidence in the country’s economic future. There has been a very substantial increase in gold imports the result of which has been the big jump in the size of the trade deficit. The rupee which is vulnerable to the various fears about the current account getting out of control, is already coming down vis-a-vis the dollar. This will help the exports no doubt but there may be a problem in stabilizing the rupee.
The Prime Minister’s ‘Make in India’ slogan is perhaps a good idea if India can attract foreign investment and it can increase employment and output and manufacturing growth. But as is well known various hurdles remain. The environmental clearance requirement and difficulties in land acquisition are both there as hurdles and the government has to clear various bills that are pending. Both land and environment are important for the country’s future. There will have to be safeguards for those who lose their land to industrialization and the Land Acquisition Bill is pending in the Rajya Sabha. It contains elements of land sellers’ rehabilitation and employment programme and the responsibility of the buyers. This bill should be supported even though many are waiting for it to be amended to make land acquisition easier. The country’s long term interests have to be kept in mind and there also has to be more employment generation through higher industrial growth. It is a big task for the Modi government which is committed to faster clearances and approvals.
The problem with slow industrial growth is that tax collections will also be poor and it raises the important question of whether the government be able to meet the fiscal deficit target? Where will the government find the money to finance all its multi-crore projects? Various disinvestment targets have been singled out and may be the process will be expedited. Selling off coal blocks is also in the agenda.
On the whole whether the government can keep its promise of providing jobs to all, reducing subsidies through direct cash payment, having a cleaner India and having a higher manufacturing growth will have to be seen in the coming months. Chances of having high GDP growth as is hoped for by the Finance Minister will require much work on the industrial front because falling industrial growth will lower GDP growth.