pace of infrastructure project completion is subdued and new project starts remain muted.
Consumption, while relatively firm so far, is starting to weaken even in rural areas, with durable goods consumption hit hard. Consequently, growth is trailing below potential and the output gap is widening. Some pick-up is expected on account of the brightening prospects for agriculture due to kharif output and the upturn in exports.
Wholesale Price Index (WPI) inflation, which had eased in Q1 of 2013-14, has started rising again as the pass-through of fuel price increases has been compounded by the sharp depreciation of the rupee and rising international commodity prices.
The negative output gap will exercise downward pressure on inflation, and the process will be aided as supply side constraints, especially relating to food and infrastructure, ease. However, the current assessment is that in the absence of an appropriate policy response, WPI inflation will be higher than initially projected over the rest of the year.
What has been raised a worrisome is that inflation at the retail level, measured by the Consumer Price Index (CPI), has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence.
On the external side, weakening domestic saving, subdued export demand and the rising value of oil imports — most recently due to geopolitical risks emanating from West Asia — have led to a larger current account deficit (CAD).
Concerns about funding the CAD, amplified by capital outflows precipitated by anticipated tapering of asset purchases by the US Fed, increased the volatility in the foreign exchange market.
The causes for uncertainty
On the global front, the Fed will meet in December again and one will have to wait to see if it takes a call on tapering (or scaling back) of bond purchases worth $85 billion every month and the global crude prices continue to remain at elevated levels.
The reason for the Fed putting off its tapering schedule was because the US economy continues to remain weak and there are a few potentially significant risks in doing so. The biggest impact of the Fed’s