Signs of recovery, but a lot still to do

Good news finally seems to be here, and one hopes for a sustained stay. This was noted by none less than RBI governor Raghuram Rajan who said Monday’s GDP numbers (7.4 per cent) “is good news and establishes confidence in the way the macreconomic situation is evolving”. In his fifth bi-monthly monetary policy statement on Tuesday, he said the economy was in the early stages of recovery, with manufacturing showing robust growth in capital goods, cars and auto ancillaries, and while there is weakness in agriculture, allied agricultural activities are strong. The severity of losses due to the late monsoon on the rabi crop can be minimised significantly by astute supply side management by the Centre. Government spending on housing will also boost construction.

The services sector is still a mixed bag: transport picked up with a spurt in commercial vehicle sales and aviation passenger traffic accelerated, this was overshadowed by the slowdown in tourism, a dip in cargo handled at major ports, rail freight traffic, domestic and international air cargo and steel consumption. But these too could pass as recent steps by the government on rail, port and road projects, together with the RBI’s low income housing loan provisons, will boost construction. New business orders are flowing in and RBI order books, inventories and capacity utilisation surveys indicate robust growth in new manufacturing orders in the second quarter and decline in finished goods inventories.

Interestingly, Dr Rajan also sees an enabling environment with an easing monetary policy, that could give a fillip to private investment demand along with a fall in input prices and improved conditions in ease of doing business. This encouraged him to keep GDP growth projections for 2015-16 unchanged at 7.4 per cent or even 7.5 per cent. Controlling inflation is necessary for growth, but the RBI will also be vigilant on commodity price developments, especially food and oil. Interestingly, the consumer price index rose for the last three months due to price hikes in housing, recreation and amusement and personal care and effects, such as education and healthcare, which contributed the most to headline inflation “and warrants vigilance”.