The easiest conclusion from the zero growth in November WPI inflation is that RBI needs to cut rates. CPI and WPI traditionally track each other well, except for a period in 2009, and this reinforces the view that CPI will continue to fall in the manner it has over the past few months.
Indeed, were global commodity, especially oil, prices to continue to fall, WPI could even go into the negative territory—primary commodities contracted 0.98% and fuel/power fell 4.91% in November. At 0%, it is important to keep in mind, WPI inflation is at its third lowest since 1982 and the lowest it has been in the last five years. Also, had RBI Governor Raghuram Rajan not changed the goalpost and moved from RBI principally tracking WPI instead of CPI—as a new index, its statistical quirks have also not been ironed out—it is certain repo rates would have started falling many months ago. More important, WPI and CPI have been falling despite there being no monetary transmission for a year—SBI last raised its base rates in November last year.
What is more worrying, though, is what the data says about India’s growth potential. While RBI’s capacity utilisation survey will be out only by the end of the month, at 70.2%, this has never been lower since the first quarter of FY12; in which case, it will be several quarters till investment levels pick up. This is also seen from the fact that, while the government’s Project Management Group (PMG) talks of clearing projects worth over $100 billion, there has been no uptick in credit growth—in other words, at current rates of growth and/or capital, it simply doesn’t make sense to revive these projects. The same message is reinforced by the latest IIP data which, at minus 4.2% for October 2014, is the lowest in the last three years; and the 35% contraction in consumer durables makes it the worst since the current series began.
In which case, RBI and others, including in the government, need to relook their GDP growth forecasts to see if they’ve read the signs all wrong.
While the impact of global prices is certainly felt in WPI, the steady fall in CPI reinforces the lack of demand pressure in the economy. The assumption that investment growth would return once animal spirits recovered and once the UPA’s policy paralysis ended has not quite turned out the way most thought it would.