From the looks of it, India will be the first major economy to shrug off the global recession: both output and prices are poised to accelerate. Factory output, most affected by the meltdown, is displaying remarkable resilience despite languishing exports. Industrial output grew by 8.2 per cent in June and 6.8 per cent in July this year and initial indicators for August — car sales and power generation — suggest that the momentum is gathering. June-September should be able to post decent numbers before we go into a quarter where a statistical phenomenon called the base effect comes into play. Last year’s crisis hit India in October 2008, plunging manufacturing growth rates over the next two quarters. If
Indian industry keeps barreling on, its performance over the next six months will appear magnified against the low base of a year ago.
The base effect — this time with the opposite impact — also comes into play for inflation. Negative wholesale inflation for some weeks now owes itself to the spike in prices last year. The high point was reached in August 2008, after which inflation tapered off. This year, we are now moving into positive territory for wholesale inflation and the tempo will pick up in the October-December quarter. This will be aided by very high food inflation that is not captured in the wholesale price index. The impact of deficient monsoon rain during the summer sowing season is still being evaluated, but be prepared for a surge in headline inflation after January.
Earlier this month, Finance Minister Pranab Mukherjee argued at a G-20 meeting in London against premature withdrawal of coordinated fiscal stimuli. His view was in the majority. Yet, D. Subbarao, Governor of the Reserve Bank of India, who also attended the meeting, argues for an early exit because “inflation has come upon us much sooner than other countries”. The street is speculating the central bank could raise its key policy rates as early as January. India’s stimulus package has a large component of income redistribution built in, and it pre-dates the financial crisis, so rolling it back will not be easy. Monetary tightening will have to accompany the government’s ambitious borrow-and-spend programme. We just might be able to pull it off if India reaches steady-state growth before either prices or interest rates begin hurting too much.