Indian economy has been struggling to recover from a stagflation-type situation where economic growth has been stuck below 5 percent for the past seven quarters while prices continue to rise at a fast clip.Data for retail inflation and industrial output, due later on today, will likely show the same trend.
Retail inflation is expected to ease further to a 25-month low of 8.35 percent in February from 8.79 percent in January on moderating vegetable prices. But industrial output is forecast to post a fourth straight fall in January, the longest phase of contraction that Indian factories have suffered in more than five years.
India's exports fell for the first time in eight months in February, signalling the country may miss its annual export target for the second straight year, data released on Tuesday showed.
Moreover, hail and heavy rains in the past two weeks have damaged crops, which could see food prices spike again.Purchasing managers indexes are already pointing to underlying inflationary risks as rising input costs last month, thanks to higher raw material prices and wage increases, forced firms to pass on them to their clients.
This is likely to keep core retail inflation elevated. It has been stuck at around 8 percent for the past three months, a level Reserve Bank of India (RBI) chief Raghuram Rajan deems uncomfortably high.Retail inflation has been averaging around 10 percent for the past two years.In an attempt to quell price pressures, Rajan has raised interest rates three times since September, even though economic growth is languishing at around a decade-low of 4.5 percent. The central bank is next due to review rates on April 1.
His inflation fight has raised concerns about a potential clash with the traditionally more growth-oriented government, which has been insisting on a balance between price stability and growth.
Industrial production probably shrank 0.6 percent on year in January, its fourth contraction in a row. It has fallen 0.1 percent year-on-year between April and December, dragged down by weak investment and consumer demand.
With investment growth on track to hit an 11-year low, some economists say India's growth potential has fallen to around 6.5 percent from about 9 percent seen before the 2008 global downturn.
Contracting industrial output and an investment slump pulled down economic growth to a worse-than-expected 4.7 percent in the quarter to December. And the outlook for the current quarter is not bright, either, as firms are wary of committing fresh investments before the election outcome is known.
This leaves election spending, estimated to be as high as 0.5 percent of gross domestic product (GDP), as the main hope for a growth uptick.Election spending will certainly have a positive impact on consumption demand, which has been weak and is one of the principal reasons for the growth slowdown.