Wholesale inflation for the month of February 2018 eased to 2.48% from 2.84% in the month of January 2018. This fall was led by negative inflation in primary products and almost flat inflation in manufactured products. The flat inflation in manufactured inflation had an oversized impact since its share in WPI inflation is nearly 65%. The weak WPI inflation also means that producers are losing out on pricing power and that is not great news for GDP growth or for top-line growth of Indian companies. The 11-month WPI inflation has more than halved from 4.92% last year to 2.30% this year.
The government decided to extend the Urea Subsidy by another 3 years till 2020, as per the recommendations of the Department of Fertilizers. The additional cost of this extension will be nearly Rs.165,000 crore over the next 3 years. This will ensure that adequate quantity of Urea is made available to farmers at statutorily controlled prices. The DBT mechanism will also ensure that that 100% of the sale proceeds will go to the fertilizer company and the entire subsidy burden will be borne by the government in the budget. This is likely to add a huge burden to the government Fisc.
In the light of the PNB fraud, the RBI governor Urjit Patel and called for more powers to be given to the RBI to regulate and actually impose regulations on banks. Patel pointed out that the RBI had very limited statutory powers to remove directors of PSBs, replace management, force mergers or even to initiate liquidation. He also underscored that since most PSBs were majority owned by the government, there was a degree of dual control that was exercised over the PSBs. Patel also hinted that the $32 billion bailout of the state run banks was not a very intelligent use of scarce resources.
The ruling BJP suffered a setback by losing the by-elections in Phulpur, Gorakhpur and Araria. The first two seats were represented by the Uttar Pradesh CM and the deputy CM and the Araria seat in Bihar had become a straight battle between Lalu and Nitish Kumar. Markets are likely to be unhappy with the results as it opens up the possibility that a combination of small regional parties stood a good chance of calling the shots in the centre in the 2019 general elections. More than a case of anti-incumbency it was about the opposition parties getting their poll arithmetic right; which is the worry for the BJP.
The World Bank has projected India’s GDP to grow at 7.3% in the fiscal year 2019 but is of the view that touching 8% growth is going to be extremely difficult. For the fiscal year 2017-18, the GDP growth is likely to be well under 7%, largely due to the weak growth in the first 2 quarters. World Bank estimates that the impact of GST and demonetization should get neutralized by the next fiscal year and the economy should be able to revert to 7.3% in 2019 and 7.5% in 2020. World Bank also pointed out that if India was really looking at above 8% GDP growth then major structural reforms in the area of land reforms, labour reforms, capital account reforms etc will be essential. World Bank has also warned that the leeway for the Indian economy to spend its way to growth was limited.
With just a year to go for the elections, the Modi government has renewed its efforts towards labour reforms with the idea of giving jobs a big push. The much awaited industrial relations legislation is likely to be introduced in parliament in early April. The government was planning to moot a bill where companies with less than 300 employees could lay off staff without seeking government permission. However, that bill appears to have been put on hold. The government is pushing to compress 44 different labour laws into 4 broad codes to make the task of regulating labour simpler and more transparent
