ET NowIn an interview with ET Now, Saugata Bhattacharya, Economist, Axis Bank, shares his views on the IIP data and inflation. Excerpts:
ET Now: The capital goods output is disappointing, which clearly indicates that there is no signs of improvement as far as orders are concerned and nothing is changing on the ground.
Saugata Bhattacharya: We at Axis Bank were not surprised. Our estimate was 0.7 to 0.6%. So it is fairly close to that. This is not something which happens month on month. June numbers give us some hope that this would be a beginning of the trend, but then we immediately saw the core sector numbers come down and given the signs of credit and what we had seen in the earlier quarter one numbers, a big bust in industrial growth was very unlikely. Even market consensus was around 2.5%.
On capital goods, there are some encouraging signs due to the improved investor confidence in India’s economy. India’s economy is probably one of the best amongst the various emerging market economies that we have. This has enabled many corporates, particularly the highly-leveraged corporate, to buy through QIPs, public issues and so on, to raise a significant amount of equity in the months of June and July.
So, we are beginning to see a process of a gradual deleveraging of high debt that we had seen build up over the past four or five years. There are certain issues even in the banking sector. We need healthy banks to ensure growth revival. The Reserve Bank of India is definitely taking measure to ensure that banks emerge as a healthy class, but all of these will take time. It is not as if this is going to happen overnight.
Mythili Bhusnurmath: But if you look at the inflation front, you see that while overall inflation has come down marginally may be to 7.8%, food inflation, on the contrary, seems to have gone up from 9.3 to 9.42%. How worrisome is that? Is it too insignificant an increase or is it a warning signal that the ill-effects of a poor monsoon are yet to kick in?
Saugata Bhattacharya: It is a worry because the food inflation has been sticking at these high levels for a long time. This is almost unprecedented that for such a long period of time we have had a sustained high level of inflation in food. We know at least partially the cause, which is the complete lack of increase in productivity in food grains.
But some of the underlying drivers for food seems to have petered out, whether it would be the wage increases, or the total subventions of the government, NREGA’s and so on. Despite that the food prices remain stuck. As inflation is high, the prices are not just stuck, but are increasing. So it might be localised in this particular month due to some of the disruptions of scanty rainfall or excess rainfall.
On the whole, we need to get this whole process of the farm to market logistics in place quickly. This is not a six-month project, but within the next couple of years, it will have to move. Together with that, the entire structure of procuring food grains, either through APMCs or direct delivery, also needs a relook.
I am, however, not very sure whether just diluting the concentration of APMs is going to cut it because the numbers indicate that only a small amount of some vegetables, potatoes, onions etc comes in through APMCs.
These are things which need to be put in place within the next one year or so with a one-year time-frame and that will probably alleviate to a certain degree some parts of this. Measures need to be put in place, both to increase productivity and to improve the logistics, to get whatever we have more efficiently out into the markets.
ET Now: The capital goods output is disappointing, which clearly indicates that there is no signs of improvement as far as orders are concerned and nothing is changing on the ground.
Saugata Bhattacharya: We at Axis Bank were not surprised. Our estimate was 0.7 to 0.6%. So it is fairly close to that. This is not something which happens month on month. June numbers give us some hope that this would be a beginning of the trend, but then we immediately saw the core sector numbers come down and given the signs of credit and what we had seen in the earlier quarter one numbers, a big bust in industrial growth was very unlikely. Even market consensus was around 2.5%.
On capital goods, there are some encouraging signs due to the improved investor confidence in India’s economy. India’s economy is probably one of the best amongst the various emerging market economies that we have. This has enabled many corporates, particularly the highly-leveraged corporate, to buy through QIPs, public issues and so on, to raise a significant amount of equity in the months of June and July.
So, we are beginning to see a process of a gradual deleveraging of high debt that we had seen build up over the past four or five years. There are certain issues even in the banking sector. We need healthy banks to ensure growth revival. The Reserve Bank of India is definitely taking measure to ensure that banks emerge as a healthy class, but all of these will take time. It is not as if this is going to happen overnight.
Mythili Bhusnurmath: But if you look at the inflation front, you see that while overall inflation has come down marginally may be to 7.8%, food inflation, on the contrary, seems to have gone up from 9.3 to 9.42%. How worrisome is that? Is it too insignificant an increase or is it a warning signal that the ill-effects of a poor monsoon are yet to kick in?
Saugata Bhattacharya: It is a worry because the food inflation has been sticking at these high levels for a long time. This is almost unprecedented that for such a long period of time we have had a sustained high level of inflation in food. We know at least partially the cause, which is the complete lack of increase in productivity in food grains.
But some of the underlying drivers for food seems to have petered out, whether it would be the wage increases, or the total subventions of the government, NREGA’s and so on. Despite that the food prices remain stuck. As inflation is high, the prices are not just stuck, but are increasing. So it might be localised in this particular month due to some of the disruptions of scanty rainfall or excess rainfall.
On the whole, we need to get this whole process of the farm to market logistics in place quickly. This is not a six-month project, but within the next couple of years, it will have to move. Together with that, the entire structure of procuring food grains, either through APMCs or direct delivery, also needs a relook.
I am, however, not very sure whether just diluting the concentration of APMs is going to cut it because the numbers indicate that only a small amount of some vegetables, potatoes, onions etc comes in through APMCs.
These are things which need to be put in place within the next one year or so with a one-year time-frame and that will probably alleviate to a certain degree some parts of this. Measures need to be put in place, both to increase productivity and to improve the logistics, to get whatever we have more efficiently out into the markets.
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