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Tuesday, December 12, 2017
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Green shoots? Maybe, but they need watering
Are there green shoots in the economy? Do Achche Din lie ahead of us? Given the number of times such false hopes have been raised over the past couple of years, it is much too hasty to conclude that the recent thread of positive economic data puts the country firmly on the path of accelerated economic growth. While three data points suggest that the economy may be turning the corner, they don’t offer conclusive evidence that there will be a period of sustained growth. The Index of Industrial Production (IIP) has registered a 2 per cent growth in February after three consecutive months of decline. While it is significant that industrial activity is returning to the expansionary mode, the cumulative growth rate of 2.6 per cent in the first eleven months of this fiscal doesn’t call for cracking open the champagne. After all, this is lower than last year’s 2.8 per cent and also well below the 6 per cent expansion in output the country has averaged in the last ten years. As for the dip in consumer price inflation to 4.8 per cent in March from over 5 per cent, this moderation, particularly in the food component of the index, is good news as it puts more disposable income in the hands of consumers. But then, low inflation rates have a flip side too. By hurting nominal GDP growth and corporate revenues, very low inflation can adversely impact job prospects and income growth, both of which are crucial for the feel-good factor in the economy. A third trigger to growth is expected from the Reserve Bank of India’s accommodative policy stance on both interest rates and liquidity, reiterated in its recent review. It is perhaps this, combined with the Centre’s concerted push on promoting infrastructure and encouraging start-ups, that has prompted RBI Governor Raghuram Rajan to predict that India is poised for a ‘leap in production’.
While the stimulus measures will take some time to play out, one factor that could have an immediate impact on the economy is a bountiful monsoon. The IMD’s forecast that there is a 64 per cent probability of the South West monsoon bringing in above-normal or excess rain is indeed good news after two consecutive seasons of drought-like conditions. Erratic growth in agriculture has been the wild card in India’s GDP estimates in recent years. In 2015-16, industry and services were estimated to grow at 7.3 and 9.2 per cent, respectively, while agriculture played spoilsport at 1.1 per cent.
Though the farm economy contributes just 17 per cent of India’s GDP, the last two years have provided ample proof that rural distress has a disproportionate impact on consumption. Given that the sector employs nearly half the workforce, everyone from toilet soap manufacturers to light commercial vehicle makers looks at rural spends to shore up bottomlines. Policymakers may not like it, but at this juncture it appears India’s economic prospects are still dependent on the benevolence of the rain gods.
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