It is the month of July and along with the dark clouds in Delhi, two important economic results have just been declared on July 12, 2013. First, the general industrial output index for May 2013 has declined 1.6% as compared to the earlier level in the month of May 2012. The index for mining, given the sectoral situation, is understandable but even the manufacturing sector has recorded a negative growth of 2% over the period. On the basis of user-based classification, capital goods suffered the largest setback of 2.7% followed by basic goods. Consumer durables have recorded the largest negative growth?10.4%. Second, foreign exchange reserves held by RBI have declined to $280 billion on July 5, 2013, from $292 billion on May 24, 2013. This implies that there is net increase in supply of dollars by RBI in the market. In addition, trend in CAD, released less than a fortnight ago, at 4.8% of GDP for 2012-13 as compared with 4.2% in 2011-12, also does not augur well for the economy.

To add to the difficulty, the update to the World Economic Outlook by the IMF made early last week paints a dismal picture for the global output. The under-performance was mainly because of lower growth in emerging markets, continuation of a recession in the euro area, and a slower US expansion. The global trade expectations are not very encouraging for India. The imports by advanced countries are expected to record a negative growth of 0.8% in 2013 while exports by emerging countries and developing countries are expected to decline by 0.5%.

Thus, the economic situation needs attention to avoid any further difficulties. The prevalent investment climate and interest rates need to be examined. To begin with, there is a need to ease the monetary policy to give impetus to investment and foreign direct investment. High interest rates impact consumption of durables like four/two wheelers and these are being reflected in the lowering of IIP. In addition, as argued by Bosworth (1985), expectations play an important role in reversing the cycle, as demonstrated in the US economy in early 1980s. Even now, the recovery of the US economy, though not very steady, is a demonstration of the role of expectations. In the formation of expectations, many factors play a role, including general business environment in the economy, existing government policies and those on the anvil, the trend in fiscal indicators and global developments. In India, given the economic results, expectations seem to be depressed. Probably a robust communication policy, along with a commitment to walk the talk, may be helpful in lifting the gloom.

Most importantly, to kick-start the economy, from the abyss it is finding itself, there would be a need to undertake policy and regulatory reforms to enhance transparency and competition in the markets for land, infrastructure services, agriculture and skills. To kick-start growth, additional consideration could be to encourage affordable housing projects, even by the public sector agencies, as housing has inter-linkages with nearly 300 industries, many of which produce durable goods.

In the external sector, careful navigation would be necessitated, given the situation of low import cover of about 7 months and short-term debt rising to one-third of international reserves. RBI and the government are alert and attempting to address the situation through innovative methods to contain volatility in exchange rates. The depreciated rupee would probably help to moderate demand for fuel and energy imports as well as gold imports. But probably much more would be required. To illustrate, gold imports, after much advice and policy measures, moderated only slightly to $53.8 billion in 2012-13 from $56.5 billion in 2011-12! The prices of gold according to market sources are expected to be benign for the next few months and this could lead to surge in demand, which partly may be moderated by depreciated value of the rupee. There is a need to examine the reasons for persistence in high gold imports. And if high imports of gold are being resorted to hedge against increasing economic uncertainty, investible instruments similar to inflation-indexed bonds could be made available through the network of post offices spread across the country, given that banking penetration is low.

The high fiscal deficit and current account deficit are a cause of concern and demand a very careful crafted policy environment. In these circumstances, despite the country being in an election year, stretching the policy to exhaust the fiscal space at the Centre and states by announcing new measures like Food Security Bill covering 83 crore people may not be defensible. Rather, measures to firm up expectations and unleash forces that help to generate skills and create employment would be useful.

The author is RBI Chair Professor in Economics, IIM Bangalore. Views are personal