GS (M) Paper-3: “Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.”
State of The Economy: The bumps ahead
The recent official statistics on prices and industrial activity signals tough times ahead for India as our economy relies on public investment and private consumption to revive private investment and growth.
State of the economy: worrying trends
- The industrial output dropped by 0.4% in December 2016 i.e. a 2% decline in manufacturing and a 6.8% decline in consumer goods. This might result in low employment generation and price rise of finished goods.
- In December consumer prices had risen fractionally faster (3.4%) than wholesale prices (3.39%). But in January, wholesale prices have risen at 5.25% and the pace of price rise at the consumer level was at 3.2%. This divergence in wholesale prices and the prices consumers pay is unlikely to last long.
- Soon the consumer prices will catch up with the whole sale price, raising the inflation levels.
- The Reserve Bank of India may no longer track wholesale prices for monetary policy purposes.
- Food prices are not a problem thanks to a normal monsoon, at least for now.
- Consumer prices of non-food articles and fuel have been hard to contain. The price of fuel and power rose at 18.14%, manufactured products grew by 4% and minerals by 1%. The current whole sale price rise is because of the rise in consumer prices of non-food articles and fuel.
- A rise in oil prices beyond $65 a barrel would be a cause for concern. This poses a risk to the Centre’s fiscal arithmetic as well as India’s growth hopes. There is a belief that higher shale gas output will check a further spike.
- Excise duties on petroleum products were raised when prices were low to protect consumers from an upward price shock.
- Cutting those duties will upset revenue calculations, but leaving them untouched will affect spending and growth.
- The RBI has cited ‘transitory effects of demonetisation on inflation and output’ as the rationale for not changing the interest rates and shift from an accommodative monetary stance to ‘neutral’. RBI is unlikely to ease its stance unless it sees executive action against inflation risks.
- If inflation spikes in the coming months, it could further crimp consumer spending, with obvious consequences for the investment cycle and job creation.