A 73-month low, lowest since March 2002?that?s where the Index of Industrial Production (IIP), at 3% for March 2008, stands. Even the most hardnosed pessimist is shocked. And did someone say stagflation?rising prices and flatlining output? Consumer non-durables did most of the falling this time, consumer durables having been affected earlier and still lying low. The fall in consumer durables is dizzying, down to a few decimal points. There?s a high base effect, but the fall is sharp even after factoring that out. The overall contribution of consumer goods to industrial growth has slipped from almost one third in February to negative by March. Growth in both intermediate and basic goods also fell close to the overall industry average. Only the capital goods sector seems to have avoided a mauling. But even here, the fourth quarter growth rate of 7.2% is just about one-third the peak rate in the second quarter. Industry growing at a mere 3% is a piece of data that presages worse things, among them whether severe damage is being done to medium term growth prospects.
So, we turn to the question we ask frequently these days and increasingly despair for an answer: what is the policy response? We have seen growth slackening for five quarters now. Let?s recall that around the same time last year, when monthly industrial growth was at near peak levels, the central bank was haunted by the spectre of accelerating inflation and an overheating economy. So, it embarked on a course that was supposed to tame inflation and we were told that softening of growth is a necessary price. Now inflation is on the up and growth forces seem to be slowing down alarmingly. Go further back in time. In the mid-1990s, a similar inflation panic-engendered monetary restriction imposed a long recession on Indian industry. Growth languished for months and it took industry longer to get back confidence. A crisis of confidence may be brewing right now. Rates are high, bank lending powers are being circumscribed by CRR hikes and small and medium enterprises?the backbone of manufacturing?are in increasingly rough conditions. This was, as we have argued consistently, an absolutely avoidable situation. But as the latest monetary review showed, the error is not being admitted.
