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Hope springs for economy?

According to the latest data released by the Centre, India’s factory output growth accelerated in June and retail price inflation slowed down to a record low in July. These figures have elicited hope that the seeds of economic recovery have been sown in earnest. The Index of Industrial Production (IIP), which details out the growth of various sectors in an economy such as mining, electricity and manufacturing, grew from 3.8 percent in June for 2.5 percent in May. Retail inflation, measured by Consumer Price Index, which in turn measures changes in the price level of a market basket of consumer goods and services purchased by households, slowed down to 3.78 percent in July from 5.4 percent in June. From the perspective of the common man, more specifically, food inflation slowed down to 2.15 percent in July from 5.4 percent a month ago on the back of a 7.9 percent drop in vegetable prices. Economists have argued that the fall in retail inflation came on the back of a positive base year effect (statistical jugglery on the Centre’s part), besides a better-than-expected monsoon, which has eased food prices. However, one of the major highlights of the figures released on Wednesday was the rise in indirect tax collections by the government. During the first four months of the current fiscal, indirect tax collections increased by 37.6 percent over the same period the year before, which according to Chief Economic Advisor Arvind Subramanian is a reflection of an acceleration across key sectors of the economy. The government, one can argue, has played a part too by some of the measures it took that include excise duty increases on diesel and petrol and a rise in service tax from 12.36 to 14 percent, among others. 
Although the economy witnessed a significant pick up in urban consumer demand, with the production of consumer goods rising by 6.6 percent, rural demand remains dull. The residual effects of a delayed and deficient monsoon and the unseasonal rains that damaged standing crops have played their part, besides government inaction on the same. The government, however, hopes that the better-than-expected monsoon season will spur rural demand. Although these numbers may allow the government to push for a reduction in lending rates, the Reserve Bank of India (RBI) is unlikely to oblige. During its monetary policy review this month, the central bank was clear that it will wait for other banks to pass on the benefits of its earlier rate cuts. In addition, the policy review also said, 
“From September, favourable base effects wane”. In other words, the recent drop in retail inflation could be a reflection of a higher base effect one year ago rather than any definitive improvements in loosening supply side bottlenecks. In fact, in its monetary policy review in June, the RBI said that assuming reasonable food management, inflation is expected to be pulled down by base effects till August, but it will start rising thereafter. The policy of the central bank clearly hinges on caution and observation, at least until the United States Federal Reserve decides on what to do with its lending rates.  However, this is not to suggest that the RBI will maintain the same lending rates for the near future. 

The possibility of a rate reduction still exists, depending on the future course of action by the Centre and global events. Moreover, there is still a lack of clarity on the effects the recent Yuan depreciation will have on the Indian economy, especially with regards to our balance of trade. 
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