Indian Economy: Hopes on cooling inflation, momentum in manufacturing …

Advertisement

With both wholesale price index (WPI) and Consumer Price Index (CPI) based inflation falling in June along with pick up in manufacuturing activity heralds hope for the Indian economy in 2014-15. However, weak rainfall progress during South-West monsoon (June to September) is worrying for policy makers.

CPI inflation fell to 7.3% in June, the lowest since the new CPI series started in January 2012, from 8.3% in the previous month. This is considerably below the Reserve Bank of India’s target of 8% for January 2015. For the first quarter of fiscal 2015 CPI inflation averaged lower at 8.1% as compared to 9.5% last year. More
This was driven by a fall in food inflation to 7.9% y-o-y from 8.9% in the previous month.

Inflation fell in all food items, sharply in cereals, eggs, fish and meat, vegetables and fruits. In part the decline seen in both headline and food inflation came because of a strong base effect from last year.

CRISIL Research pointed out in a report that despite the risks from a sub-normal monsoon, food inflation may not soar considerably due to policy measures taken by the government: a) proactive measures already taken by the government b) a strong base effect from last year. In the longer run, announcements in the budget to boost agriculture and improve the supply chain will help bring down CPI inflation, but lowering and sustaining it around 6% – the Reserve Bank of India’s target for January 2016 will pose a challenge.

Meanwhile, industrial activity gathered further momentum in May with the pick-up this time stemming from consumption-oriented manufacturing industries. IIP grew by 4.7% in May, with manufacturing sector growth at 4.8%. “Industry (including construction), we believe, will grow by 3.6% in fiscal 2015 (compared to 0.4% in fiscal 2014) with some support from budgetary announcements for specific sectors, and favourable export demand.

We have however, revised down, overall GDP growth for fiscal 2015, to 5.5% (from 6% earlier) due to weak rainfall progress and its consequent adverse impact on agriculture production.

CRISIL expects improved fiscal and monetary co-ordination to help bring down inflation in the long run by sustaining it at 6%- however the RBI’s target for January will pose a challenge, CRISIL said. Initial steps towards sustainably lowering inflation were taken in the recent budget. A number of reforms related to raising agriculture production and improvement in agriculture productivity, if implemented, will help lower inflationary pressures.

Measures like setting up of a price stabilisation fund, encouraging states to set up of private agriculture markets/farmers’ markets and higher budgetary allocation for rural infrastructure and warehousing will help improve the supply chain.

Related Articles:

StriveBlue Home|Poompugar Shoppings