Visibility has rarely been as hazy as it is today for India’s economic policy makers. Monthly indicators such as industrial output and consumer inflation are worrisome. However, indirect tax collection is higher than expected. Finally, a series of lockdowns imposed by states will surely undo some of the economic gains of the last six months. It’s a challenging period which doesn’t lend itself to standard solutions.
Negative data flow this week spanned industrial output and consumer inflation. Industrial output in February contracted 3.6% in relation to the same period last year. The decline happened before the current series of lockdowns began. Moreover, the trend in industrial output over the last few months raises doubts over the durability of economic resurgence recorded towards the end of 2020. Separately, inflation data is unlikely to comfort RBI. It’s not food and fuel which are really driving inflation. Core inflation, which is more amenable to RBI’s tools, is at an elevated level. In March, consumer inflation was at 5.52% but this is unlikely to influence RBI’s monetary policy stance as it has prioritised growth over inflation. Still, the central bank, which is also responsible for financial stability, is likely to be mindful of how an extended situation of elevated inflation and low interest rates may influence decisions of domestic savers.
One way in which the situation can be improved is if Centre and states coordinate actions to limit the damage of movement curbs. Lockdowns are crude tools which are particularly damaging to workers in the informal sector. CMIE data shows that in March 2021, agriculture employed 9 million people more than it did in 2019-20. Ending lockdowns at the earliest is a precondition to providing opportunities for people to move from agriculture to more productive sectors. It will also stabilise the environment for economic policy making.
This piece appeared as an editorial opinion in the print edition of The Times of India.
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