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THE prospects for a turnaround of the economy this year have worsened despite the prediction of a normal monsoon, after the release of the recent data on inflation and industrial growth. The dismaying news is that retail inflation surged in April to 5.29 per cent from 4.83 per cent in the previous months, while industrial output rose by only 0.1 per cent in March. Also, the data for industrial growth in 2015-16 shows that it has actually slowed down to 2.4 per cent from 2.8 per cent in the previous year. This dismal data, along with the relentless drought in many states and continuing slump in exports, does not augur well for growth in the current financial year. The rise in retail prices has apparently been fuelled by food inflation which, in turn, spurted mainly due to a 34 per cent spike in pulses prices. The 6.2 per cent rise in food prices, as against 5.2 per cent in the preceding months, has thus created more inflationary pressures on the economy. This, at a time, when the Reserve Bank of India has set a target of capping inflation at 5 per cent by next year. The Index of Industrial Production (IIP) has also yielded equally worrying data. The perception that the ease of doing business has improved, or that the flow of foreign direct investment has pepped up industrial activity is evidently not borne out by reality. The latest data clearly shows that industrial output is stagnant. The IIP rose only by a meagre 0.1 per cent in March, as against 2.5 per cent in the same month last year. Similarly, the data for the entire financial year was disappointing to say the least. A detailed look at the IIP data shows that the manufacturing sector, which is the area that the ‘Make in India’ campaign has been seeking to expand, has actually declined by 1.2 per cent in March, against a growth of 2.7 per cent in the same month last year. Similarly, the capital goods sector, which is an indicator of investment activity, declined by 15.4 per cent in March this year, against a positive 9.1 per cent growth last year. In other words, all the efforts to push up industrial output, which is directly linked to jobs growth, have not succeeded till now. This is a major blow to the Modi government that had come to power on the promise of providing higher growth and more jobs for the restless, unemployed youth of the country. Even though foreign direct investment inflows are booming, this has not yet translated into concrete investments and projects on the ground. The ‘Make in India’ campaign appears to be more hype than action so far, judging by the available data. Demand in the domestic economy is clearly sluggish, leading to the poor output on the industrial front. Demand has also fallen externally, as is evident in the slump in exports. Which brings us to the relentless decline in exports for the 17th month in a row. Exports dipped by 6.7 per cent in April to reach $20.5 billion. While India’s economy is not an export led one, most of the export-oriented industries are highly labour intensive and provide employment to millions. The global recession in 2008 saw the migration of lakhs of workers from urban areas in Gujarat and Maharashtra — where they had been working as artisans in the gem and jewellery sector — back to rural areas to find employment in other areas. The subsequent revival of the global economy and the resulting pickup in gems and jewellery exports revived the fate of these skilled workers who were able to return from their villages to resume employment in this export-linked industry. Currently, the gems and jewellery sector is showing positive growth. But other areas like the engineering products segment have been declining and these are also large employers. The dip in automobile exports, for instance, similarly affects a highly job-intensive segment of the economy. Falling exports are therefore bound to affect jobs availability in the economy. These economic indicators have to be viewed in the context of the drought that has currently engulfed many parts of the country. Reservoir levels are reported to be at low in many places. Unless the monsoon proves to be not only timely, but also bountiful, it will be difficult for a resurgence to take place in rural areas, especially in states like Maharashtra and regions like Bundelkhand, which have been badly hit by drought. In this uncertain backdrop, it looks unlikely that the RBI would go ahead with yet another dip in interest rates in its next monerary review. The expectation had been that yet another interest rate cut could be on the cards if the economy continues to perform well. This rate cut was expected to provide a stimulus to investment and has been looked forward to eagerly by the corporate sector. But with the existing parameters, it seems likely that the RBI would postpone any further cuts unless there is a significant improvement in these areas. Inflation, especially, is of concern for the central bank which has made it clear that it seeks to cap price rise to 5 per cent by March 2017. The outlook for the current financial year is thus surely not a rosy one. Much will depend on the timelines and spread of the monsoon. In case the rains are plentiful, and in the right parts of the country, and at the right time, these could indeed bring about a revival in demand. At the same time, clearly much more needs to be done to stimulate investment growth, and also to make it easier for both domestic and foreign investors to do business in the country. Basic infrastructure like assured availability of power and better roads needs to match the growth in industrial projects. Performance in these areas has no doubt improved, but it is still not good enough to meet the needs of industry on a sustained basis. And finally, red tape needs to be cut much more radically than it has till now. Unless these steps are taken soon, the economic outlook for this fiscal will continue to be a depressing one.
Keywords
Indian economy, fiscal, monsoon, inflation, industrial growth, retail inflation, pulses, prices, exports, employers, falling exports, jobs availability
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