Data releases at the start of the new year did bring some cheer. Consumer Price Index (CPI) inflation, printing at 5.7% on-year for December, was below consensus expectations. And industrial production surprised on the upside, growing at 7.1% for November.
But these positive data prints require careful interpretation as they may not be indicative of the road ahead. Let us take the case of inflation. The decline in headline inflation was largely a result of sharp drop in vegetable inflation, which incidentally is highly volatile. Save vegetable inflation, consumer inflation was actually at 7.2% in December, up from 7.0% in the preceding month. Core inflation, which captures demand conditions better, remained sticky at around 6%. Although the Reserve Bank of India (RBI) targets headline inflation, core inflation is an important monitorable as it reflects the impact of demand conditions. So, the decline in headline inflation deserves a lone cheer at this juncture.
Industrial production growth was broadly in line with signals from the Purchasing Managers’ Index (PMI) for manufacturing. PMI at 57.9 for December points towards healthy industrial production. But with impending slowdown in exports, the manufacturing sector too will face the heat in the months ahead.
And finally, the National Statistical Office pegged India’s real gross domestic product (GDP) growth at 7.0 % for fiscal 2023, with private consumption and investments being the key drivers.
It needs no emphasis that medium-term sustainability of growth hinges on investment momentum. To be sure, healthy balance sheets of the corporate sector enable them to undertake investments. But it is also true that an uncertain environment does not permit the full-scale unleashing of animal spirits.
One of the important themes for the forthcoming budget therefore is how to support the nascent pickup up in investment activity – both via direct budgetary capital spending as well as by incentivizing private capex.
Central budget has certainly become more transparent by paring down the dependence on internal and extra budgetary resources (IEBR) of central public sector undertakings for firing investments while increasing the allocation to direct budgetary spend on capex. Unlike the IEBR, direct budgetary spend reflects in the fiscal deficit numbers.
Public investment has supported the economy since the pandemic struck. A decisive lift in private investments is now needed to make the improvement in investment cycle sustainable. There are good tidings on that front, but uncertain environment comes in the way of a broad-based revival of private investments.
