India's High Growth Offset by Rising Food Inflation by Sushma Ramachandran SignUp
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Analysis Share This Page
India's High Growth Offset by Rising Food Inflation
by Sushma Ramachandran Bookmark and Share
 
The Indian economy's 7.9 percent growth in the second quarter of this fiscal has taken everyone by surprise, but rising food inflation, which has seen the daily grocery bill shoot up sharply, has dampened some of the euphoria.

Those taken unawares by the high growth included economic pundits, the Reserve Bank of India (RBI) and the government itself, which had been bracing for lower growth compared to the first quarter. It augurs well for the rest of the year, as the dip in farm output growth has not been as sharp as had been expected. The full impact of the poor summer monsoon, though, may be felt in the third quarter.

The fears that the poor performance in the agricultural sector would impact the rest of the economy have not come true. In fact, manufacturing growth has been robust at 9.2 percent while mining and services have also risen by an equally healthy 9.5 and 9.3 percent, respectively.

Finance Minister Pranab Mukherjee quickly revised his growth estimates for the full year from the earlier 6.5-7 percent, while the RBI is now looking at ways to gradually exit from the fiscal stimulus put in place earlier in the year. It is clear the good news means there may be a quicker withdrawal than earlier anticipated from the stimulus measures.

Besides, the RBI is concerned about rising inflation. Though the wholesale price index has risen by only about 1.4 percent, food inflation has reached an alarming level of 17.5 percent. It seems the central banks may take some action soon, now that there is no need to worry about the prospects of affecting growth.

Senior RBI officials have already commented that the latest quarterly data is an indication that there is no need for a "permanent stimulus" and it is time to start thinking of a withdrawal.

The worries about the agricultural sector, however, have not receded even with the good news of higher growth during the July-September quarter. Farm output during the second quarter was 0.9 percent but is expected to actually decline in the third quarter, as the impact of the poor monsoon during the kharif (summer crop) season will be felt over this period.

Soaring prices of vegetables, fruits, cereals and other daily necessities have already begun to reflect the poor agricultural output. There is a strong need for intervention to ensure that the common man does not continue to suffer due to the high cost of basic goods like food. One can only hope the RBI will act sooner rather than later.

The outlook, however, is bright, as RBI Deputy Governor Usha Thorat has said the apex bank will reassess its soft policy stance in the wake of the runaway food prices. Even the chairman of the Prime Minister's economic advisory council, C. Rangarajan, has underlined the need to control food inflation through monetary action as it could lead to manufacturing inflation.

There are still fears that the impact of agriculture could affect other sectors. But all indicators so far point to continuing healthy growth in the manufacturing sector for the third quarter. Similarly, services may continue their revival especially in the light of reports that IT and consumer goods companies are creating thousands of new jobs in the last few months.

The latest data also shows that the stimulus measures put into place in several phases since September 2008 have definitely played a role in reviving the economy. Both previous finance minister P. Chidambaram, who pushed through the first phase of the stimulus, and his successor have to be given credit for a job well done.

Similarly, the RBI has had to prove its mettle by managing the Indian economy at a time when the whole world was in the depths of slowdown and recession. Barring inflation, for which measures may soon be taken, it is clear that the RBI and the finance ministry have been able to weather the crisis as it seems that there is now truly a durable turnaround.

The next step for policy makers is to rein in food inflation. But it has been an extremely difficult balancing act to ensure that economic growth is not affected while keeping prices under control. The situation was compounded by the failure of the monsoon during the vital kharif sowing season. This underlines once again
the country's vulnerability and complete dependence on monsoon. br />
OOne can only hope that the rabi (winter crop) season provides a bountiful wheat harvest. Usually the rabi crops remain relatively less affected by the fluctuations of rainfall as most of the country's surplus stocks come from the irrigated areas of Punjab, Haryana and western Uttar Pradesh.

In any case, it is clear the authorities cannot wait till the fresh harvest comes to the market. Urgent action is needed on the price front. Any delay will ultimately hinder the economic revival in the current fiscal.

(ushma Ramachandran is an economic and corporate analyst. She can be reached at sushma.ramachandran@gmail.com
12-Dec-2009
More by :  Sushma Ramachandran
 
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