In an interview with ET Now, Sajjid Chinoy, India Economist, JP Morgan, talks about IIP numbers and inflation. Excerpts:
All throughout you have the RBI who have maintained that it does not mind sacrificing a bit of growth in order to maintain inflation at more tolerable levels, but do not you think that the real question is whether we sacrifice growth completely in order to take precedence to inflation because remember you do have the IIP numbers, which came down and they have plunged to a low level of 3%?
Yeah, that was a highly misleading headline. IIP was driven very sharply last month and this month by capital goods, which are less than 10% of the index and have been very volatile throughout the year. If you take out the capital goods, the 90% of the index has been slowing but slowing very gradually around the 6.5% mark.
Add to that other indicators in the economy, indirect tax collections very strong, non-oil imports very strong. So this notion that growth has completely collapsed is grossly exaggerated. We saw the first quarter of this fiscal year growth coming at 7.7. It will have to slow more than that to bring inflation down, not because really the RBI is left with no option.
There are only two ways to bring core inflation down, either a supply curve moves out or you cool aggregate demand. Now any kind of supply response in India is going to take time, whether it's industrial capacity or infrastructure, that will take several quarters to play out.
We have been living with 9% inflation for the last year-and-a-half. The RBI has little choice but to ensure that you cool aggregate demand to bring core inflation levels down and I believe that growth and demand has not slowed enough and that is why you are seeing month after month high pricing power and these high rates of inflation.
The point about interest rates not being the sole culprit for corporate performance having weakened, on the other hand we had a number of corporates come out on Monday reacting to the IIP numbers, which came in at 3.3% saying that the RBI's rate actions are leading to some sort of a hard landing in terms of manufacturing sector growth. What would your comment on that be?
The IIP numbers are very misleading. It has been bouncing all around the place because of capital goods, which are extremely lumpy and volatile. If you strip capital goods out of the equation, you see a far more gradual slowdown in industrial production, which is probably running at 6.5% on a 3-month moving average. So I do not think that growth has completely collapsed and that is supported by other data in the economy.
If you look at indirect tax collections, both across industry and across services, these continued to be extremely buoyant. Some of this undoubtedly is because of high inflation, but it suggests that growth has not completely collapsed. If you look at non-oil imports, again extremely strong and buoyant again suggesting that growth has not completely come off. Finally I think the proof of the pudding is in the eating.
If in fact industrial demand had collapsed to such an extent, we would have seen pricing power disappear and you would have seen month on month increases in manufacturing products disappearing. That has not happened. For the last few months, we continued to see manufacturing prices go up sequentially, that suggests to me that aggregate demand is still at a point strong enough that I can pass on these input price increases. Finally, we should not judge nominal interest rates in absolute terms.
The relevant metric is real interest rates and real interest rates today whether you measure them by today's inflation rate or expected inflation rates are still lower than they were in the mid-2000s, which witnessed a very large pickup in the capex cycle. So whichever way you look at it, we have not reached the point yet where we can say that economic growth is collapsing.
Yesterday we had the central government announce an increase in the dearness allowance by 7% taking it from 51 to 58%, they are saying that the net outgo on account of that is going to be to the tune of something like Rs 4800 odd crores. Do you believe the fact that wage price inflation continues to hold up so strong is going to be really one big challenge for the RBI in fighting inflation?
That is the biggest challenge and they referred to that today by saying they want to contain inflationary expectations. Inflationary expectations, the ground are extremely strong aided by the fact that you have got into a wage price spiral in the rural economy because of MSP increases and NREGA wages being indexed.
But the fact is households and most people do not believe that this inflation is coming down anytime soon. And in a tight labour market, what that means is your real wage is protected and your nominal wages rise and that fuels the wage price spiral, which is why it is so essential for the central bank to keep signalling that it will do what it takes to bring inflation under control in the short run.
Otherwise you lose the expectations battle and then things can really spiral out of control, which is why it is very important that they have been consistent in their tones since May, that they will continue to pursue an anti-inflationary stance primarily because it is as much the lack of slack in the system as it is on high inflation expectations.