IIP

Modinomics, meet the industrial slowdown!

narendra modi
The Prime Minister, Shri Narendra Modi addressing the Nation on the occasion of 71st Independence Day from the ramparts of Red Fort, in Delhi on August 15, 2017.

The index of industrial production (IIP) figures declared earlier this week, portray a worrying picture of the overall Indian economy. The IIP is a measure of industrial activity in the country.

For the month of July 2017, the IIP grew by 1.2 per cent in comparison to July 2016. In June 2017, it had contracted by 0.2 per cent. While, there has been some improvement month on month, the overall trend of the IIP growth has been down for a while. Take a look at Figure 1, which basically plots the IIP growth (or contraction for that matter) over the last four years.

Figure 1:


As is clear from Figure 1, for more than a year now, the overall trend of IIP growth in the country has been downward. This is a clear indication of a slowdown in the growth of industrial activity.

One of the ways through which IIP is measured is referred as economic activity based classification. As per this method, manufacturing accounts for 77.6 per cent of the IIP. And if things for overall IIP have been bad, they have been worse for manufacturing. Take a look at Figure 2, which basically plots the growth (and contraction) in manufacturing over the last four years.

Figure 2:

modinomics
Source:  Ministry of Statistics and Programme Implementation.

What does Figure 2 tell us? The manufacturing scene in the country doesn’t look great. In July 2017, manufacturing grew by just 0.1 per cent, after having contracted by 0.5 per cent in June 2017. This is a trend that was also visible in the gross domestic product (GDP) data released in late August 2017. Let’s take a look at Figure 3, which plots the growth rates of industry and manufacturing using GDP data, over the last four years.

Figure 3:

Figure 3 clearly tells us that the growth in industry and manufacturing as per the GDP data is at a four-year low. For the period April to June 2017, industry and manufacturing grew at 1.6 per cent and 1.2 per respectively, in comparison to the same period last year.

What does this mean for the overall economy? Industry has formed around 29-31 per cent of the GDP over the years. The fact nearly one-third of the economy is barely growing should be a big reason for worry. This will impact economic growth in both direct and indirect ways. If one-third of the economy barely grows, overall economic growth is bound to slowdown. That is the direct impact.

What about the indirect impact? In order to understand this, we need to figure out how many people actually work for industry. In 2009-2010, the industry as a whole employed around 9.9 crore individuals. Analysts, Nikhil Gupta and Madhurima Chowdhury, who work for stock brokerage Motillal Oswal, in a recent research note using data from the 2014-2015 Annual Survey of Industries, state: “Over the past 35 years, employment in Indian industrial sector has grown at an average of ~2%.” The actual figure is 1.9 per cent per year.

Hence, employment in the industrial sector tends to rise at the rate of 1.9 per year on an average. Using this, we can conclude that by March 2017, the total number of people working in industry would stand at around 11.3 crore. Further, the average Indian family has 5 people. Given this, around 55 crore individuals in a population of 130 crore or around 42 per cent of the population depend on income from industry, in one way or another. An if the industry is barely growing, these people will go slow on their consumption and other expenditure, and in the process slowdown overall economic growth. This is the indirect impact.

Why is this happening? The economic slowdown initiated by demonetisation is basically continuing. It is worth remembering that first and foremost is a medium of exchange. It is a token to carry out economic transactions. When you take 86.4 per cent of the currency in circulation out of an economy, where 80 to 98 per cent of the consumer transactions (in volume, and depending on which data source you take) is carried out in cash, economic transactions are bound to slowdown. And ultimately this is reflecting in the manufacturing data.

If there is slowdown in consumption, there is a bound to be a slowdown in manufacturing. If people are not buying stuff at the same pace as they were in the past, there is no point in companies increasing production like they were in the past.

The irony is that this crisis the Modi government brought upon us. Indeed, this is very worrying in a country where one million individuals are entering the workforce every month. That makes it 1.2 crore, a year. If the growth in industrial sector slows down to the level that it currently has, how will any jobs be created for these youth.

And that is a question worth asking.

The column originally appeared in Newslaundry on September 14, 2017.

 

Why zero inflation is bad for the economy

zero

Vivek Kaul

The wholesale price index (WPI) for the month of November 2014 was flat. Hence, wholesale prices in November 2014 were at the same level as November 2013.
For an economy that has been batting a very high rate of inflation, an inflation of zero percent, should come as a welcome relief. Only if things were as simple as that.
The devil, as they say, lies in the detail. The question to ask here is why is inflation at zero percent?
The price of food products which make up for around 14.34% of the index rose by just 0.63% in comparison to the last year. Onion prices are down 56.3% from last year. Vegetable prices are down 28.6%. Nevertheless, potato prices have gone up by 34.1%.
But this seems like a temporary trend and may soon reverse. The kharif (summer-autumn) season has seen a decline in production of most crops, due to a poor south-west monsoon this year. Over and above this, recent data from the ministry of agriculture points out that the total area coverage under rabi (winter) crops has fallen. It stood at 470.74 lakh hectares while last year’s sowing area was at 503.66 lakh hectares.
Several important rabi crops have seen a fall in total sowing area. As the ministry of agriculture press release points out: “Wheat`s sowing area is at 241.91 lakh hectares as compared to last year’s 251.32 lakh hectares…The area under sowing of Gram is at 71.51 lakh hectares this year while the last year’s figure was 85.75 lakh hectares. Area coverage under Total Pulses is at 111.13 lakh hectares while the last year’s sowing area coverage was 124.78 lakh hectares.”
And this is a worrying sign, which could push food prices up in the months to come.
Another major reason for zero inflation in November is a fall in oil prices. Petrol and diesel prices have fallen by around 10% and 3% respectively in comparison to November 2013. In fact, the government increased the excise duty on diesel and petrol twice since October, else inflation as measured by the wholesale price index would have been negative for the month of November 2014.
Falling food and fuel prices are good news because they leave more money in the hands of people. Nevertheless, its in the third and the biggest component of the wholesale price index where the bad news lies.
Manufactured products make for around 65% of the wholesale price index. The inflation in this case was minus 0.3% in November 2014, in comparison to October 2014. Since the beginning of this financial year, the manufactured products inflation has been at 0.8%. And in comparison to November 2013, the number is a little over 2%.
What this tells us is that manufactured products inflation has more or less collapsed. A major reason for the same lies in the fact that people are going slow on buying goods. This becomes clear from index of industrial production(IIP) for the month of October 2014, when looked from the use based point of view. IIP is a measure of industrial activity in the country.
The consumer goods number is down 18.6% from October 2013. It is down 6.3% since the beginning of this financial year. The consumer durables number is down 35.2% from last year and 16% from the beginning of this financial year. And finally, the consumer non-durables number is down by 4.3% from last year and up only 1% from the beginning of this financial year.
What this clearly tells us is that despite falling inflation, people still haven’t come out with their shopping bags.  When consumers are going slow on purchasing goods, it makes no sense for businesses to manufacture them. Also, that explains why manufactured goods inflation has almost been flat through this financial year.
This is a worrying sign. If consumer spending is slower than usual, businesses suffer and this translates into slower economic growth. Further, businesses have no incentive to expand also in this scenario. The capital goods number in the IIP is down 2.3% from last year.
So why are consumers not spending? A possible explanation lies in the fact that inflationary expectations (or the expectations that consumers have of what future inflation is likely to be) continue to be high. The wounds of high inflation are still to go away. People need inflation to stay low for a while, before they will really start believing that low inflation is here to stay. As and when that happens, they will come out with their shopping bags all over again.
As per the previous Reserve Bank of India’s Inflation Expectations Survey of Households, the inflationary expectations over the next three months and one year are at 14.6 percent and 16 percent. In March 2014, the numbers were at 12.9 percent and 15.3 percent.
Interestingly, today the RBI put out a press release stating that the October to December 2014 quarterly round of the inflationary expectations survey was being launched. Once the data for this survey comes in, we will come to know where the latest inflationary expectations stand.
If inflationary expectations fall, then it is likely that the consumer demand will improve and the broader economy will pick up as well. If inflationary expectations fall to very low levels, then consumers might also start postponing purchases, in the hope of getting a better deal. Whether that happens, we don’t know as yet. Until then, we will have to wait and watch.

The article originally appeared on www.FirstBiz.com on Dec 15, 2014

(Vivek Kaul is the writer of the Easy Money trilogy. He tweets @kaul_vivek)

Raghuram Rajan won’t cut interest rates even in Hindi

ARTS RAJANAt a recent function, Raghuram Rajan, the governor of the Reserve Bank of India (RBI), spoke in Hindi. The joke going around in the social media after that was that even in Hindi, Dr Rajan refused to cut the repo rate. Repo rate is the interest rate at which the RBI lends to banks. Nevertheless, four pieces of data that came out last week, will increase the pressure on Rajan to cut the repo rate. These four pieces of data are as follows:

  1. Inflation as measured by the consumer price index fell to 5.52% in October 2014. It was at 6.46 % in September 2014 and 10.17% in October 2013. 

  2. Inflation as measured by wholesale price index fell to 1.77%. It was at 2.38 % in September 2014 and 7.24% in October 2013. 

  3. The index of industrial production, which is a measure of the industrial activity within the country, grew by 2.5% in September 2014, in comparison to September 2013. The IIP for August 2014 was only 0.4% higher in comparison to August 2013. Interestingly, some economists believe that this marginal recovery in the IIP will not hold for October 2014. The reason for this lies in the fact that indicators of industrial activity like car sales, bank loan growth etc., have slowed down in October 2014. 

  4. The bank loan growth for a period of one year ending October 31, 2014, stood at 11.2%. This had stood at 16.4%, for the period of one year ending November 1, 2013. The loan growth year to date stands at 4.6%. It was at 7.6% last year.

These four data points have got the Delhi based economic experts and industry lobbyists brushing up their economic theory again. “It is time that the RBI started to cut interest rates,” we are being told. Chandrajit Banerjee, the director general of the Confederation of Indian Industries, a business lobby said “This provides sufficient room to the RBI to review its prolonged pause in policy rates and move towards policy easing in its forthcoming monetary policy especially as investment and consumption demand are yet to show visible signs of a pick-up.” This was a sentiment echoed by A Didar Singh as well. Singh is the secretary general of Federation of Indian Chambers of Commerce and Industry (FICCI), which is another industry lobby. As he put it “The inflationary expectations are fairly tamed and we see no immediate upside risks with regard to prices. Given that, it is important to reiterate that demand remains subdued. The consumer durables segment reported negative growth for the fourth consecutive month in September. It is imperative that all levers are used to pep up demand.” The idea here is simple. If the RBI cuts the repo rate, banks will cut the interest rates they charge on their loans as well. If that were to happen, people would borrow and spend more, and businesses would borrow and invest more. And this will lead to faster economic growth. Economics 101. QED. Banerjee and Singh are not the only ones asking for an interest rate cut. Sometime back industrialist Anand Mahindra had said that “It might be time for the RBI to think of a rate cut…The need of the hour has changed and its time to start to look to support growth.” Sunil Mittal, chief of Bharti Airtel, also suggested the same when he told CNBC TV 18 that the finance minister Arun Jaitley “had spoken for the nation,” when had asked for an interest rate cut. In an interview to The Times of India in late October Jaitley had said “Currently, interest rates are a disincentive. Now that inflation seems to be stabilizing somewhat, the time seems to have come to moderate the interest rates.” While all this sounds good in theory, things are not as simple as the businessmen and the politicians are making it out to be. It is worth recounting here what Rajan had said in a speech in February 2014: “But what about industrialists who tell us to cut rates? I have yet to meet an industrialist who does not want lower rates, whatever the level of rates.” And what about the politicians? Alan Greenspan, the former chairman of the Federal Reserve of the United States, recounts in his book The Map and the Territory that in his more than 18 years as the Chairman of the Federal Reserve, he did not receive a single request from the US Congress urging the Fed to tighten money supply and thus not run an easy money policy. In simple English, what Greenspan means is that the American politicians always wanted lower interest rates. The Indians ones aren’t much different on that front. Nonetheless, the question is will lower interest rates help in reviving consumption and investment? Let’s tackle the issues one by one. Let’s say an individual wants to buy a car. He borrows Rs 4 lakh to be repaid over a period of five years at a rate of interest of 10.5%. The EMI on this works out to Rs 8,598. Let’s say the RBI cuts the interest rate and as a result the interest rate on the car loan falls to 10%. The EMI now works out to Rs 8,499 or around Rs 100 lower. Now will an individual go out and buy a car because the EMI is Rs 100 lower? Even if interest rates fall by 200 basis points (one basis point is one hundredth of a percentage) to 8.5%, the EMI will come down by only around Rs 400. For two wheeler and consumer durables loans, the differences are even smaller. Hence, suggesting that lower interest rates lead to higher consumption isn’t really correct. The real estate experts think that cutting interest rates will help revive the sector. The basic problem with the real estate sector is that prices have gone totally out of whack and a cut in interest rates is not going to have any significant impact. What about corporate investment? As Rajan had asked in his speech “Will a lower policy interest rate today give him more incentive to invest? We at the RBI think not…We don’t believe the primary factor holding back investment today is high interest rates.” So what is holding back investment? The answers are provided in a recent report titled “Will a rate cut spur investments?Not really“, brought out by Crisil Research. As the report points out “Investment growth, particularly private corporate investment, plummeted in the fiscals 2013 and 2014, despite low real interest rates. During this time, the policy rate in real terms – repo rate minus retail inflation – has been negative, and real lending rates averaged 2.4%. This is significantly lower than the 7.4% seen in the pre-crisis years (2004-2008). Yet investment growth dropped to 0.3%, down from an average 16.2% seen in the pre-crisis years.” The accompanying chart makes for an interesting read. 

After 6 years, real repro rate (adjusted for CPI inflation) turns positive

Source: RBI, Central Statistical Office, CRISIL Research Note: Nominal repo rate at the fiscal year-end minus average CPI inflaction , F= Forecast

As Crisil Research points out “During fiscals 2013 and 2014, when investment growth slumped to 0.3% per year, the real repo rate was still minus 2.1%, while the real lending rate was only +2.8%. Only in June 2014, for the first time in six years, did the real repo rate turned mildly positive.” So companies were borrowing and investing at higher “real” interest rates earlier but they are not doing that now. Why is that the case? This is primarily because the expected rate of return on investments has fallen “because of high policy uncertainty, slowing domestic and external demand, and rising input costs driven by persistently elevated inflation.” “The rate of return on investments – as proxied by return on assets (RoA) of around 10,000 non-financial companies as per CMIE Prowess database – have fallen sharply to 2.8% in fiscal 2013 and 2014 from 5.9% in the pre-crisis years,” Crisil Research points out. Moral of the story: Corporates invest when it is profitable to invest, and not simply because interest rates are low. Indeed, the other factors that are likely to revive investment are in the hands of the government and not RBI. Hence, a cut in interest rates is neither going to revive consumer demand nor corporate investments. Having said that, high food inflation has been a big factor behind high inflation. And the RBI really cannot control that. Also, food inflation has come down considerably in the recent past. So why not just cut interest rates? Rajan explained it very well in his February speech where he said “They say the real problem is food inflation, how do you expect to bring it down through the policy rate? The simple answer to such critics is that core CPI inflation, which excludes food and energy, has also been very high, reflecting the high inflation in services. Bringing that down is centrally within the RBI’s ambit.” Further, food prices might start rising again. The government has forecast that the output of kharif crops will be much lower than last year and this might start pushing food prices upwards all over again. Also, recent data showsthat vegetable and cereal prices have started rising again because of the delayed monsoon. To conclude, despite falling inflation, the inflationary expectations (or the expectations that consumers have of what future inflation is likely to be) are on the higher side. As per the Reserve Bank of India’s Inflation Expectations Survey of Households: September – 2014, the inflationary expectations over the next three months and one year are at 14.6 percent and 16 percent. In March 2014, the numbers were at 12.9 percent and 15.3 percent. Hence, inflationary expectations have risen since the beginning of this financial year. And for inflationary expectations to come down, low inflation needs to stay for a considerable period of time. As Rajan said “A more important source of our influence today, therefore, is expectations. If people believe we are serious about inflation, and their expectations of inflation start coming down, inflation will also come down…Sooner or later, the public always understands what the central bank is doing, whether for the good or for the bad. And if the public starts expecting that inflation will stay low, the central bank can cut interest rates significantly, thus encouraging demand and growth.” If inflationary expectations are controlled only then will consumer demand revive and that in turn, will lead to revival of corporate investments as well. Given this, it would be surprising to see Rajan start cutting the repo rate any time soon. The article originally appeared on www.equitymaster.com on Nov 17, 2014

Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He has just finished writing a trilogy on the history of money and the financial crisis. The series is titled Easy Money. His writing has also appeared in The Times of India, Business Standard, Business Today, The Hindu and The Hindu Business Line. 

Inflation dips, but here’s why Indians don’t believe it will stay low


deflationHere is the good news—the inflation as measured by the consumer price index for the month of October 2014 came in at 5.52%. It was at 6.46 % in September 2014 and 10.17% in October 2013. The price of food products which make up 42.71% of the consumer price index rose by 5.59% in October 2014, in comparison to the same period during the previous year.
A major reason for the fall in inflation has been a global fall in food prices. The Food and Agriculture Organization’s Food Price Index averaged at 192.3 points in October 2014. It was lower by around 0.2% in comparison to the September number. In comparison to a year earlier, food prices fell by 6.9%. Global food prices have now fallen for seven months in a row, and this has been the longest slide since 2009.
While food prices on the whole haven’t been falling in India, vegetable prices fell by 1.45% during October 2014 in comparison to October 2013. Interestingly, they had risen by 45.7% in October 2013 in comparison to October 2012. Cereal prices during the month went up by 6% in comparison to 12% a year earlier. Also, only two food products showed an increase in price of greater than 10%. The price of milk went up by 10.8% and the price of fruits went up by 17.5%.
Nevertheless, food prices might start rising again. The government has forecast that the output of kharif crops will be much lower than last year and this might start pushing food prices upwards all over again. As the Business Standard reports “As per very preliminary estimates, India’s food grain production in 2014-15 kharif crop season is expected to be around 120 million tonnes, nearly 9.5 million tonnes less than last year, but officials have said that there could be a further downward revision in the estimates as arrivals gather steam from middle of November onwards.”
And this could push up prices in the days to come. As As Rupa Rege Nitsure, Chief Economist, Bank Of Baroda told Reuters “recent data shows that towards the end of October we have seen spikes in vegetable prices as well as in cereal prices because of delayed monsoon. So there’s a big question of sustainability of these readings.”
Falling food inflation has come as a big relief given that half of the expenditure of an average household in India is on food. In case of the poor it is 60% (NSSO 2011). Over and above this a fall in global oil prices has also helped. Fuel and light inflation in October 2013 was at close to 7%. In October 2014, the number came in at 3.3%.
Hence, it can clearly be seen that there has been some relief on the inflation front.
For more than five years, inflation in general and food inflation in particular was very high. High inflation ate into the incomes of people and led to a scenario where their expenditure went up faster than their income. This led to a cut down on expenditure which was not immediately necessary.
With food inflation coming down, this should leave more money on the table for people to spend and at least theoretically should lead to a revival of consumer demand and hence, industrial activity. It is worth remembering here that when people cut down on expenditure, the demand for manufactured products falls as well. This is in turn reflected in the index of industrial production (IIP).
The IIP for the month of September 2014 was 2.5% higher in comparison to September 2013. This is a little better than the IIP for the month of August 2013 which was only 0.4% higher in comparison to August 2013. The IIP is a measure of the industrial activity in the country.
The manufacturing sector which forms a little over 75% of the IIP, grew by 2.5% during the course of the month. The number had fallen by 1.4% in August 2014. Hence, there seems to have been some recovery on this front. Nevertheless, it is highly unlikely that recovery will sustain in the months to come.
As Nisture put it “What really matters is that all other indicators of economic activity actually have slowed in the month of October, whether it is PMI, or credit demand or auto sales. So I don’t think that today’s reading of industrial production is sustainable.”
Further, what is worrying are the consumer goods and the consumer durables sectors. The numbers representing these sectors are both down in comparison to last year. When we look at the IIP from the use based point of view it tells us that consumer durables (fridges, ACs, televisions,computers, cars etc) are down by 4% in comparison to September 2013. The consumer goods are down by 11.3%.
What this clearly tells us is that despite falling inflation, people still haven’t come out with their shopping bags.  When consumers are going slow on purchasing goods, it makes no sense for businesses to manufacture them.
Why is that the case despite falling inflation? A possible explanation is the fact the wounds of a very long period of high inflation still haven’t gone away. People are still not ready to believe that low inflation is here to stay. Hence, inflationary expectations (or the expectations that consumers have of what future inflation is likely to be) are on the higher side.
As per the Reserve Bank of India’s Inflation Expectations Survey of Households: September – 2014, the inflationary expectations over the next three months and one year are at 14.6 percent and 16 percent. In March 2014, the numbers were at 12.9 percent and 15.3 percent. Hence, inflationary expectations have risen since the beginning of this financial year.
The only possible way to bring them down is to ensure that low inflation persists in the months to come. Only then will people start to believe that low inflation is here to stay. And once that happens, it won’t take much time for some consumer demand to return. As Shivom Chakrabarti, Senior Economist at HDFC Bank told Reuters “The real improvement in industrial production will be seen next year when inflation comes down, which will spur consumer spending and exports will be higher.”

The article originally appeared on www.FirstBiz.com on Nov 13, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek) 

Yes, inflation is lower, but Arun Jaitley should not be happy about it just yet

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010Vivek Kaul

The wholesale price index (WPI) inflation for September 2014 came in at a five year low of 2.38%. In a statement released yesterday, after the WPI inflation number was published, the finance minister Arun Jaitley said “It is heartening to note that we have been able to bring food inflation under control. Growth in vegetable and protein prices that have been contributing to the recent increase in inflation rates have shrunk thanks to the steps taken by the government. We are committed to continuing reforms in food markets that will improve supply responses and keep inflation low and stable.”
Food inflation, which forms around 14.34% of the wholesale sale price index, stood at 3.52% during September 2014. In comparison it had stood at 18.68% during September 2013. The price of the politically sensitive onion crashed by 58% in September 2014, in comparison to a year earlier. Vegetable prices have fallen by 14.98%. But potato prices rose by 90.23% during the same period. Fruit prices were up by 20.95% and milk by 11.55%. Nevertheless, the overall rise in food prices has slowed considerably in comparison to the last few years.
The government deserves some credit for this, but there are clearly other factors at work as well. The global food prices have also fallen in the recent past. The Food and Agricultural Organization of the United Nations said in a recent statement that the “the decline” in food prices “in September marks the longest period of continuous falls in the value of the index since the late 1990s.” Food prices in September 2014 fell by 2.5% in comparison to August 2014 and 6% in comparison to September 2013. Hence, global food prices have also had an impact.
While Jaitley is quick in taking trading for controlling inflation, he offers no explanation for the low manufacturing products inflation. Manufacturing products make up 64.97% of the wholesale price index. Inflation in this group was at a low 2.84% during September 2014. This was not significantly different from the 2.36% inflation that prevailed during the same period last year.
A low manufacturing products inflation is a reflection of the low consumer demand that has been prevailing in India for a while now. For more than five years, food inflation in India was at very high. High inflation ate into the incomes of people and led to a scenario where their expenditure went up faster than their income. This led to a cut down on expenditure which is not immediately necessary. As I have often pointed out in the past, half of the expenditure of an average household in India is on food. In case of the poor it is 60% (NSSO 2011)
When people cut down on expenditure, the demand for manufactured products falls as well. This lack of demand is also visible in the index of industrial production(IIP) number, which rose by a minuscule 0.4% in August 2014 in comparison to August 2013. The IIP is a measure of industrial activity in the country.
Nevertheless high inflation can no longer be an explanation for lack of consumer demand. Inflation has constantly been falling over the last few months. So why isn’t the Indian consumer in the mood to get his shopping bags out again? One possible explanation is that despite falling inflation, inflationary expectations still remain high (or the expectations that consumers have of what future inflation is likely to be). Or as economists like to put it the inflationary expectations have become firmly anchored.
A good data point to look at is the Reserve Bank of India’s Inflation Expectations Survey of Households: September – 2014 which was a survey of 4,933 urban households across 16 cities, and which captures the inflation expectations for the next three-month and the next one-year period. The median inflation expectations over the next three months and one year are at 14.6% and 16%. In March 2014, the numbers were at 12.9% and 15.3%. Hence, inflationary expectations have risen since the beginning of this financial year.
The RBI points out that these inflationary expectations “are based on their individual consumption baskets and hence these rates should not be considered as benchmark of official measure of inflation.” Nevertheless, “the households’ inflation expectations provide useful directional information on near-term inflationary pressures.”
What these numbers clearly tell us is that the Indian consumer is still not convinced about the fact that low inflation is here to stay. As the RBI Survey points out “The survey shows that housewives and retired persons have marginally higher level of inflation expectations based on median inflation rates…About 72.8 per cent (72.0 per cent in the last round) and 78.7 per cent (74.0 per cent in the last round) of respondents expect double digit inflation rates for three-month ahead and one-year ahead period, respectively.”
These expectations have ensured that the low consumer demand scenario has continued despite a fall in inflation. This also explains why many analysts are downgrading the economic growth expectations for this financial year. JP Morgan recently predicted an economic growth of only 5.1%, instead of the earlier 5.3%.
The only way the Indian consumer will get his shopping bags out again is if inflation continues to stay low for a while. Whether that happens remains to be seen. Some economists are still not convinced that the spiral of food inflation has been broken. They feel only after November 2014, the real picture on the food inflation front will start to emerge, once the impact of the below normal monsoons on summer crops becomes more visible.

The article originally appeared on www.FirstBiz.com on Oct 16, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)