Time to either cut or run

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The latest data coming in both from India and abroad indicates that India might face a slowdown in GDP growth. Finance minister P Chidambaram has indicated that he would like to see lower interest rates. Budget 2007-08 cut income taxes, reduced excise duty and adopted an overall expansionary stance. Will RBI respond to the possibility of a slowdown by cutting interest rates? Dr YV Reddy has indicated that the central bank looks at domestic data and not US interest rates to determine India’s monetary policy stance. In that case, let us look at quarterly GDP data. The year 2006-07 started with a bang. The first quarter, April-June 2007-08, witnessed GDP growth of 9.8% (year on year) over the corresponding quarter in the previous year. This decelerated to 8.9% in the second quarter and to 8.4 in the third quarter. Industrial growth decelerated from 12% in the first quarter of the year to 9.1% in the second quarter, and then to 8.4% in the third quarter. Construction, one of the fastest growing sectors, slipped from a quarterly growth rate of 17.3% in the first quarter to 11.1% in the second quarter and then to 8.4% in the third quarter.

Data for IIP growth behaved similarly. It slipped from 14.8% in March 2007 to 7.6% in December 2007. At the same time, inflation based on the consumer price index (industrial workers) fell from 7.6% in February 2007 to 5.5% in December 2007. Inflation based on the WPI (all) also fell during this period. It fell from 6.6% in March 2007 to 3.9% in January 2008.

In other words, by the end of the year, the overheating of the economy that had worried many observers had subsided. Inflation was brought under control, industrial growth was contained and the real estate bubble and construction boom had been moderated.