UPA's fighting chance: low prices, good rains

The govt, hit by economic woes and scandals, has bumped into a small window of political opportunity: inflation levels are the lowest since UPA 2 took office; the country is set to avoid drought and industrial activity is trending up. Zia Haq reports. Trending downwards

The government, hit by economic woes and scandals, has bumped into a small window of political opportunity: inflation levels are the lowest since UPA 2 took office; the country is set to avoid a drought for the fourth straight year and industrial activity is trending up.

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Together, these trends represent the best bet for the government to fix the economy, its biggest worry, analysts say.

Falling food prices, at a 14-month low, could be a major respite, since they form the largest chunk of monthly expenditure of average Indians and affect the poor most.

A 10% rise in food prices proportionately hits household welfare in developing nations, according to the UN's Food and Agricultural Organisation.

In a sign that the slowdown has ended, India's industrial production rose for the third straight month in March, the latest month for which data is available.

The monsoon, the economy's lifeblood, is on course.

By this weekend, it is expected to hit the Andamans, its first port of call on Indian territory, helped by favourable conditions over the Bay of Bengal, said Sivananda Pai, a Met department forecaster.

The summer rains are critical for India, Asia's third biggest economy, because two-thirds of Indians depend on farm income.

As high prices essentially shrink monthly incomes, inflation alone could be perceived as a failure of the government.

"This is the first time since November 2009 that WPI inflation has decelerated below 5%," Upasana Chachra, an economist with Morgan Stanley, a global financial services company, said in a report.

The UPA had assumed office in May 2009.

With prices falling, economists now predict the Reserve Bank to cut interest rates further, spurring growth.

"We expect a 50 basis point rate cut in the second half of 2013," said Sonal Varma, an economist with Japanese brokerage firm, Nomura. A basis point is one hundredth of a per cent.

However, hectic gold buying could worsen the current account deficit - i.e. more imports than exports - stoking inflation again.

Revision of electricity prices (10% hike) and coal prices (15%) are also overdue, which could push prices up.