Okay, so how many more signs do we need to realise that the economy is sputtering? The Index of Industrial Production is 5.3% for January, around half the level of January 2007. Break the index up and the picture is scarier. Capital goods, the bellwether sector for India?s good growth times, have clocked just 2.1%?the lowest in almost six years. The figure for domestic production of machinery and equipment is -3.8%, the lowest since December 2001. There can be no clearer sign that the bad news from slowing consumption growth?durables have been hit hard, although non-durables continue growing?has affected domestic investment sentiment deeply. The manufacturing sector growth rate has halved, and its price growth is slowing down. So far, slow growth in consumption was being buoyed by healthy capital goods; the sector grew at double-digit rates for an unprecedented 18 quarters. What now?
Remember the mid-1990s when the zeal to control inflation squeezed the life out of industry? This time, the central bank hasn?t changed its key rates for months. The finance minister, almost pleading for a policy change, might as well sit on a dharna outside RBI headquarters in Mumbai, with a banner saying, ?People demand rate cut?. The FM tried to stimulate demand in his Budget?income tax cuts, targeted excise duty reductions, even the loan waiver can be a demand stimulant. But the Congress is also paranoid about inflation; it had blamed the party?s loss of Punjab and Uttarakhand on the price rise. Therefore, the refusal of the monetary authority to distinguish between inflation that calls for a credit squeeze and inflation caused by commodity supply constraints extends in some ways to the ruling political establishment. It needs to be asked, who?s paying the price of 2007?s interest rate hikes if in early 2008 inflation is up again? It was a wrong diagnosis then?what was required was supply management, not a monetary cold shower?and the wrong and strong medicine persists. The commodity price rise, as commentators have argued, is a global phenomenon now, but, as has been pointed out in these columns, real interest rates in other major Asian economies are far lower than India?s. There?s nothing inevitable about the economic gloom that may be coming; intelligent men who were and are convinced they are right produced it.
