For policy makers seeking to engineer a turnaround in an economy the two most crucial gauges are: Movements in the price line and levels of production activity in factories. For India, the latest set of data should be a pleasant sight.
After three consecutive months of contraction, factory output grew 2% in February. A caveat, however, may be in order. Manufacturing grew by 0.7%. Manufacturing accounts for over 75% weight in the index of industrial production (IIP) — the broadest metric for measuring economic activity in the business landscape — and its crawling growth indicates that the revival may take longer than what the headline growth rate suggests.
The bigger good news is that retail inflation in India has moderated to 4.8% in March from 5.3% in the previous month, signs that the government seems to have got a grip on managing the price conundrum. Inflation eased in March aided by moderate growth in food prices, raising expectations that the Reserve Bank of India (RBI) could cut interest rates further in the coming months. Non-food, non-fuel inflation or what economists refer to as “core inflation” also fell to 5.4% from 5.7%.
The RBI in its monetary policy review earlier this month cut the repo rate by 0.25%, signalling its belief that the price line will likely remain low in the coming months. Accompanied by the projection of a higher-than-normal monsoon, the downward trend in retail inflation sets the perfect stage for further rate cuts by RBI.
People’s spending patterns are also determined by, among other things, expectations about their income and cost of goods. Inflation expectations have also slowed down, which implies that households expect the cost of living to rise at a slower clip. There is no appropriate price index that accurately measures the cost-of-living inflation in India.
The RBI conducts inflation expectation surveys on a quarterly basis. While it may not be treated as a forecast of any official measure of inflation, it provides useful inputs on directional movements of future inflation. According to the RBI’s latest survey, households expecting inflation to rise in the coming months has fallen to 31% from 36% in December 2015.
There are a few hurdles before one opens the bubbly. The current spate of low inflation has been primarily aided by low international commodity prices, and persistently soft crude oil prices. A reversal of these trends could potentially push back inflation to uncomfortable levels. A lot will also depend on the spatial distribution of the June-September summer rains. For the moment though, the sprouting green shoots offer a lot of hope.