Economic data likely to point to weak growth, high inflation

New Delhi: Consumer inflation and industrial output data on Wednesday will likely offer little evidence of a respite from high inflation and weak economic growth before a general election that begins next month.

Asia's third-largest economy has been struggling to recover from a stagflation-type situation, where economic growth has been stuck below 5 percent for the past seven quarters while prices continue to rise at a fast clip.

Retail inflation is expected to ease further to a 25-month low of 8.35 percent in February from 8.79 percent in January on moderating vegetable prices. But industrial output is forecast to post a fourth straight fall in January, the longest phase of contraction that Indian factories have suffered in more than five years.

India's merchandise exports fell for the first time in eight months in February, signalling the country may miss its annual overseas sales target for the second straight year, data released on Tuesday showed.

Cooling prices will offer some relief to the Congress party, which is trailing in opinion polls ahead of the polls that begin on April 7. It is still widely expected to go down to defeat, in part for its failure to control inflation and revive the economy.

Moreover, hail and heavy rains in the past two weeks have damaged crops, which could see food prices spike again.

"The lingering inflation risks call for central bank vigilance to keep it in check," sataed Leif Eskesen, Chief Economist for India and ASEAN. Purchasing managers indexes are already pointing to underlying inflationary risks as rising input costs last month, thanks to higher raw material prices and wage increases, forced firms to pass on them to their clients.

This is likely to keep core retail inflation elevated. It has been stuck at around 8 percent for the past three months, a level new Reserve Bank of India (RBI) Chief, Raghuram Rajan deems uncomfortably high.

Retail inflation has been averaging around 10 percent for the past two years, way above a target of 4 per cent recently proposed by an RBI panel.

In an attempt to quell price pressures, Rajan has raised interest rates three times since September, even though economic growth is languishing at around a decade-low of 4.5 percent. The central bank is next due to review rates on April 1.

His inflation fight has raised concerns about a potential clash with the traditionally more growth-oriented government, which has been insisting on a balance between price stability and growth.

Rajan, however, calls price stability a necessary condition to promote growth and has rejected views of a trade-off between the two.

Elevated prices and a slowing economy have pressured household budgets and company profits, hitting consumer demand as well as corporate investments.

Industrial production probably shrank 0.6 percent on year in January, its fourth contraction in a row. It has fallen 0.1 percent year-on-year between April and December, dragged down by weak investment and consumer demand.

With investment growth on track to hit an 11-year low, some economists say India's growth potential has fallen to around 6.5 percent from about 9 percent seen before the 2008 global downturn.

Contracting industrial output and an investment slump pulled down economic growth to a worse-than-expected 4.7 percent in the quarter to December. And the outlook for the current quarter is not bright, either, as firms are wary of committing fresh investments before the election outcome is known.

This leaves election spending, estimated to be as high as 0.5 percent of gross domestic product (GDP), as the main hope for a growth uptick.

"Election spending will certainly have a positive impact on consumption demand, which has been weak and is one of the principal reasons for the growth slowdown," said Madan Sabnavis, Chief economist at CARE ratings.