India, never an easy country to understand, just got a shade more difficult to take a bet on. Industrial production, including utilities and mines, rose 8.6% in February, according to the index of industrial production figure released on Friday, way ahead of just 5.8% in January. At the same time, inflation has accelerated to 7.41% in the week ended March 29, the quickest rise in more than three years. There is no economy in the world throwing up such an asymmetric set of data. There is, therefore, need for plenty of caution before arriving at the conclusion that India is at the beginning of a serious decline in its globally-discussed rate of economic growth. It is not just rare but almost impossible for an economy to experience a very high rate of inflation with a high growth rate. High inflation would normally upset calculations for the rate of return on investments so badly that few entrepreneurs would risk their money on any project. Admittedly, the spike in inflation is still not in the ?very high? range, and it has stayed high for less than a quarter, while industrial plans are of longer duration. But the rise in production of capital and intermediate goods to 10.4% and 8.2%, year-on-year, means that higher investment is taking place in power plants and factories, which in turn will boost demand for electricity and cement. So, entrepreneurs are still out there.
The reason for this dissonance in the India story is that even now this is a nation of two economies, despite the changes that have occurred. At one level, the economy is definitely responding to global cues. But there is enormous untapped growth potential embedded within the economy, which is what makes companies move. For instance, and RBI please note, the spike in inflation has not been brought on by too much money sloshing around the economy; the latest banking data shows that credit offtake is pretty much on track. Rather, inflation is a reflection of the shortages in those sectors still battling restrictions and an anarchic transport infrastructure. Is this also the reason why estimates of growth figures are beginning to show so much variation between merchant bankers, IMF and others? Bets on the economy, as mentioned earlier, are becoming more difficult.
