IIP, inflation data pose tough challenge for next govt

When it rains, it pours, and this time, it is raining bad news for the incoming government. A slew of economic data paints a rather grim picture of what's ahead and the mounting challenges for the new government. Consumer Price Inflation for April is up to 8.59% from 8.31% in March, rural inflation (provisional) for rural areas is at 9.25% and for urban areas at 7.69%, up from 8.89% and 7.59% in March.

Factory output of a nation of over a billion shrunk 0.5%-the cumulative growth for April-March 2013-2014 is at (-)0.1%. Crucial sectors such as mining, manufacturing and electricity were in the negative at (-)0.4%, (-)1.2% and 5.4%.

One of the foremost expectations from the new government would be to bring inflation under control, which to a large extent has been driven by supply side constraints, an issue that has mostly gone unaddressed under UPA.

In its effort to bring inflation under control, the Reserve Bank of India has embarked on a monetary tightening policy and is likely to continue if inflation continues unabated. High interest rate cycle has been one of the triggers for businesses to hold back investments and breaking that cycle would be challenging for the new government.

"We look to the next government and hold out strong hope that quick and bold reforms and implementation will enable a high growth path where manufacturing will play a significant role", said  Sidharth Birla, President, FICCI.
 
"Industry is looking at announcements in new Budget and Foreign Trade Policy to boost manufacturing and investment, and we hope there will be supporting steps from the Reserve Bank on the monetary policy side", Birla added.
 
Adding to that is the expectation that the monsoon will be below normal because of the El Nino effect, which could fuel food inflation further. The only way perhaps to soften the blow of inflation would be to fuel growth and that should the first priority of the new government.

Declining or stagnant factory output is symptomatic of a deeper issue that has plagued investment and growth cycle in India, restoring investor confidence to get production and manufacturing going would be a challenge that will have to be tackled at several levels from gaining credibility to easy access of funding - and results of efforts by the new government, if any, would not be visible in a hurry.

The good news is that India's current account deficit seems to be under control - after contracting for two months - India's export growth rose better than expected at 5.3% in April from -3.1% in March.

The rupee has strengthened and the Indian stock market is riding high on hopes of a stable government - but the honeymoon, as is widely believed, is usually short lived. Expectations are running high for the new government and with high expectations, pessimism too, is likely to set in rather quickly.