The Economy hasn’t Recovered

Why in news?

With prices rising and manufacturing slowing, the economy hasn’t completely recovered.

Why is 2^nd quarter data misleading?

An impressive 2nd quarter (July to Sep) growth of 6.3% after slowing for at least 4 quarters was touted as a recovery.
Sovereign rating upgrade by a global agency and an improvement in World Bank’s ‘ease of doing business’ index was also a positive.
But the official data for the 3^rd quarter, so far suggest that factors such as rising oil prices could upset the fragile recovery.
Notably, manufacturing growth in the 2^nd quarter was a major factor in the second quarter growth pick-up.
But this was primarily driven by restocking by producers after the rollout of the GST - a onetime event and not a sustainable trend.

How does October’s data read in comparison?

After 2 months of robust 4%-plus Industrial growth, the ‘Index of Industrial Production - IIP’ slipped in October to just 2.2%.
Despite October being a festive month, consumer durables production contracted by nearly 7%.
Mining activity was virtually stagnant, and manufacturing growth moderated to 2.5% from 3.8% last October.
Also, at a time when global trade is picking up, India has seen a 1.1% export slump after over 13% in the 2^nd quarter.
There has also been a nearly 10% drop in GST collections in October compared to September.
The IIP has now grown just 2.5% in the first seven months of 2017-18, compared to 5.5% in the same period last fiscal.

How is the inflation outlook?

With job creation still poor, latest inflation data reflects a broad-based price rise under way, primarily due to fuel & food inflation.
From just 1.5% in June to 3.6% in October, CPI inflation currently touches 4.88%, which is a 15 month high.
Within food, rising onion and tomato prices pushed vegetable inflation to a 16-month high of 22.5% and egg prices rose by 8%.
While some of this food inflation could wane soon, there is greater concern about core inflation (excluding food and fuel).
Also, recently oil prices breached the $65 a barrel mark for the first time in over 2 years – which would constrain our imports.

What are the challenges?

Slashing fuel taxes could calm inflation, but it would hit revenue collections that are already uncertain owing to GST.
Not cutting taxes would leave less room for the central bank to lower interest rates due to inflation fears.
Notably, ‘Economic Survey’ has stated that if oil persists at $60-65 a barrel, it would further dent consumption and investment.

Source: The Hindu