INTRODUCTION
Our economy is expected to attain a growth rate of 7.5% in
FY2015-16 and would consequently surpass China as per a Global Economic
Prospects (GEP) report that was recently released by the World Bank. A number
of macro-economic variables, such as inflation as measured by the CPI and WPI
indices, have also played out favourably in this regard. This in turn provided
sufficient headroom to the RBI to have a more accommodative stance with regards
to the monetary policy.
The central bank lowered the policy rate by 25bps twice
this year and followed it with another cut of 25bps on 7th
May, 2015, making it
amply clear that there was uncertainty regarding monsoon and the expected
increase in rates by the US Federal Reserve down the line (though we do have
forex reserves to the tune of $350Bn) among other factors. Following the
announcement the SENSEX tanked by more than 600 points.
Though the stock markets nosedived, it is important to
understand that monetary policy can perhaps only act as a catalyst in the
process of growth and not substitute for deeper and broader changes that would
be required in different sectors of the economy. It is vital that a number of
issues are tackled so as to actually sustain India’s higher growth rate as
compared to its peers in the coming years.
(It would be pertinent to note that a decrease in the policy
rate would not always automatically lead to lower lending rates by banks and
consequently an increased appetite for consumption of capital or consumer goods
by the people.)
Recently changes were introduced in the method of GDP
calculation as well as the revision of base year from 2004-05 to 2011-12. The
CPI index was also modified.
Product
taxes and product subsidies are different from production taxes and production
subsidies in that the former are received or paid on per unit of product (such
as excise tax and petroleum subsidy) and the latter are independent of the
quantum of production (stamps, subsidy to railways).
GVA- Gross Value Added
CE - Compensation of
employees
OS - Operating
Surplus (Gross Output – Cost of Intermediate Goods and Services – CE)
MI - Mixed Income
(Self-employed and professionals)
CFC – Consumption of Fixed Capital
Besides the above, better coverage of the activities of the
manufacturing and the service sector has been facilitated by the use of MCA21
database, an initiative of the Ministry of Corporate Affairs.
The Consumer Price Index underwent a base year revision from
2010 to 2012. Some of the other changes include-
·
Under CPI (Rural) the weightage for clothing and
footwear has increased from 5.36% to 7.36% and for fuel and light has decreased
from10.42% to 7.94%.
·
Similarly under CPI (Urban) the weightage for
clothing and footwear has increased from 3.91% to 5.57% and fuel and light has
decreased from 8.40% to 5.58%.
·
Sample size for collection of house rent data
doubled from 6,684 to 13,368.
·
Usage of geometric mean instead of arithmetic
mean to compile item indices.
As regards the Wholesale Price Index a new Producers Price
Index (PPI) may replace WPI by FY2016. The latter would include services as a
component to give a complete picture which the former does not.
CURRENT SCENARIO
1.
Consumer Price Inflation (CPI)
Figure 1.1
Figure 1.2
As can be seen from the above graphs, both the CPI (Rural)
and CPI (Urban) showed a continuously declining trend from April, 2014 to
November, 2014. CPI (Urban) declined from a high of 8.51% in April, 2014 to
3.48% in April, 2015. Similarly CPI (Rural) declined from 8.46% in April, 2014
to 3.15% in November, 2014.
Thereafter both the indices have shown an upward swing with
the CPI (Rural) being higher than CPI (Urban) in April, 2015. The latest data
show the CPI (Combined) at 5.01% for the month of May, 2015 as opposed to 4.87%
in the previous month.
The policy rate (and consequently interest rates) may not
decline further if retail inflation continues to register an increase.
2.
INDEX OF INDUSTRIAL PRODUCTION (IIP)
Figure 2.1
Figure 2.2
The growth in capital as well as consumer goods has been
erratic. The index for consumer goods shows that the growth rate remained
negative or close to zero in ten out of thirteen months as shown in the graph
above. This possibly points to weak consumer demand irrespective of the fact that
CPI (Urban) declined from 8.51% to 3.41% in the same period.
The capital goods index showed negative growth in the months
of August and October, 2014. Post that the growth rate has increased steadily
possibly pointing to a slow revival in manufacturing, which should aid the Make
in India initiative.
AREAS OF CONCERN
Of late a number of macro-variables have registered
improvement like the fiscal deficit (4% of GDP for FY2014-15), the Current
Account Deficit (1.3% for 2014-15) and the inflation indices. But to sustain
such an improvement in the long run, infrastructure investment would be
crucial. Of particular importance is the Indian Railways.
While high inflation will always remain a major impediment
to growth, investment in railways by means of having dedicated freight
corridors would certainly help in bringing down retail inflation. The railways
consume 75 to 90 per cent less energy for freight as compared to road and
consequently the unit cost of rail transport for freight is lower by ₹2 per net
tonne kilometre. Currently the same track network is used by passenger and
freight trains in the country with priority for movement given to the former.
While comparisons with countries such as China with regards
to our growth rate may not be completely out of line, but the capacity addition
to India’s rail network has lagged that of China since 1995. Our route capacity
has remained stable at around 63,000 to 65,000 kilometres. In early 1990s the
Chinese rail network was shorter as compared to India’s but by 2010 the rail
network in China was over 90,000 kilometres.
Also the railways sector has strong forward linkages (sector
where this service would be an input to production). It is estimated in this
context that a ₹1 investment in railways could increase the output of other
sectors by around ₹2.5 suggesting a significant multiplier effect. This would
help to crowd in private investment.
Implementing some of the recommendations present in the
Bibek Debroy panel report may actually help the railways in resource mobilization
for much needed investment. These include adoption of better accounting
practices and a reduction activities that may not be remunerative in nature.
APPENDIX
APPENDIX A1
MONTH
|
CAPITAL GOODS
|
CONSUMER GOODS
|
Apr'14
|
235.0
|
181.5
|
May'14
|
228.0
|
182.7
|
Jun'14
|
270.7
|
166.9
|
Jul'14
|
263.2
|
171.3
|
Aug'14
|
220.6
|
161.1
|
Sep'14
|
260.9
|
172.4
|
Oct'14
|
239.2
|
149.0
|
Nov'14
|
252.1
|
165.1
|
Dec'14
|
269.7
|
192.4
|
Jan'15
|
270.5
|
202.3
|
Feb'15
|
255.4
|
199.9
|
Mar'15
|
330.1
|
203.1
|
Apr'15
|
261.2
|
187.2
|
APPENDIX A2
MONTH
|
CPI (RURAL)
|
CPI (URBAN)
|
CPI (COMBINED)
|
April,
2014
|
8.46
|
8.51
|
8.48
|
May,
2014
|
8.21
|
8.44
|
8.33
|
June,
2014
|
7.44
|
6.11
|
6.77
|
July,
2014
|
7.95
|
6.73
|
7.39
|
August,
2014
|
7.67
|
6.39
|
7.03
|
September,
2014
|
5.87
|
5.30
|
5.63
|
October,
2014
|
4.76
|
4.47
|
4.62
|
November,
2014
|
3.15
|
3.48
|
3.27
|
December,
2014
|
4.16
|
4.50
|
4.28
|
January,
2015
|
5.34
|
4.96
|
5.19
|
February,
2015
|
5.79
|
4.95
|
5.37
|
March,
2015
|
5.67
|
4.75
|
5.25
|
April,
2015
|
5.37
|
4.36
|
4.87
|
REFERENCES
1 http://indianexpress.com/article/india/india-others/bibek-debroy-panel-report-get-regulator-in-5-yrs-then-scrap-rail-budget/
2.
http://dbie.rbi.org.in/DBIE/dbie.rbi?site=home
3.
http://www.moneycontrol.com/news/economy/apr-iip-zooms-to-41-may-cpiline-at-501_1422801.html
4.
Economic Survey of India 2014-15
5. http://economictimes.indiatimes.com/news/economy/indicators/indias-growth-rate-set-to-surpass-china-this-year-world-bank/articleshow/47621953.cms
6.
Monetary Policy Report, April, 2015.
ABOUT THE AUTHOR
This report has been made by Tarun Vasnani, who is currently
pursuing MBA from the Institute of Management, Nirma University located in
Ahmedabad, India.
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