BREAKINGVIEWS - India's bad economic data may spur better policy

MUMBAI Wed Sep 12, 2012 2:58pm IST

Employees roll power wires on wheels at the Kei Industries in Rajasthan August 6, 2012. REUTERS/B Mathur/Files

Employees roll power wires on wheels at the Kei Industries in Rajasthan August 6, 2012.

Credit: Reuters/B Mathur/Files

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MUMBAI (Reuters Breakingviews) - Almost flat industrial production may sound like bad news in India. But July's disappointing figure may be just what the country needs. It might lead to a reduction in wasteful fuel subsidies, which account for a large chunk of India's fiscal deficit, currently 5.9 percent of GDP.

The new Finance Minister, P. Chidambaram, understands the problem. According to a Reuters report, he is working up a plan with the Reserve Bank of India that would amount to a policy trade: he unveils fiscal reforms and the central bank eases interest rates. The RBI's reluctance to move first is easy to understand. India's inflation rate probably picked up slightly in August from July's near three-year low as poor summer rains drove up food prices, a Reuters poll showed. That gives the RBI even less room to cut policy rates at its meeting next week.

But with GDP growing at just a 5.5 percent annual rate in the June fiscal quarter, near its slowest rate in three years, the Indian economy needs a kick-start. Chidambaram's appointment may have bought the government a reprieve from international credit rating agencies, which have threatened to downgrade India to junk status over New Delhi's policy paralysis. But unless he shows more than just a rhetorical change, they are unlikely to remain at bay for long.

The weak industrial production numbers confirm how anaemic India's growth has become. Still, while that strengthens the finance minister's case for fast action, it's no foregone conclusion that the whole government will actually bite the bullet. The country has a sad history of ignoring warnings of all sorts.

Will this time be different? So far Delhi is making the right noises on the need to reduce fuel subsidies. The weak economy is an opportunity to break the habit of over-promising and under-delivering.

CONTEXT NEWS

- Data released by the Central Statistics Office on September 12 showed July output at factories, mines and utilities was 0.1 percent higher than the previous year. That was slightly lower than a forecast of 0.3 percent growth in a Reuters poll, but an improvement on an annual contraction of 1.8 percent logged in June.

- GDP grew at an annual rate of 5.5 percent in the last quarter, as compared to over 7 percent 12 months ago. Worries about inflation, currently running at 6.9 percent, have led the Reserve Bank of India, the central bank, to resist lowering interest rates, despite the slowdown in growth. The RBI is widely expected not to change its key lending rates when it reviews its monetary policy on Monday.

- Manufacturing, which accounts for the bulk of industrial production and contributes about 15 percent to overall GDP, contracted 0.2 percent in July from a year earlier compared with a contraction of 3.1 percent a month ago. Capital investment in the economy grew 0.7 percent in the second quarter of 2012 from a year earlier. Capital goods output, a key investment indicator, shrank an annual 5 percent in July. It has increased only once in the past 11 months.

- India will have to raise the price of heavily subsidised fuels such as diesel, Oil Minister Jaipal Reddy said on September 11, indicating that hikes could be announced within a week.

(Editing by Edward Hadas and Sarah Bailey)

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

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