The latest economic numbers are a mixed bag. The Index of Industrial Production (IIP) for July was disappointing, showing both industrial and manufacturing sector growth to have come in at 7.1% and manufacturing at 7.2%. Consumer durables, that had clocked a growth of 16% in July 2006, have actually experienced negative output growth of 3.2% in July and even for the four months April to July their output has declined though marginally by (-) 0.3%. For these four months, the IIP trough still shows a growth rate of 9.6%, which though lower than the 11.1% achieved in April to July 2006, is still a healthy rate. The core sectors, which include all the infrastructure sectors, showed even a lower growth rate. Inflation, however, is weakening, with the level coming down to 3.8% for the week ending August 25 and the average for August 2007 being 4% from the peak levels of 6.6% in March. Core inflation has also been coming down in the last four months, but is still at 5.1% in August. Foreign trade numbers, on the other hand, are not so encouraging, with the export growth for July coming in at 18.5% and for the April-July period at 18.2%. With import growth of 30.6% for the same four months, the trade balance has worsened appreciably, compared to the previous year. These mixed numbers have prompted some senior observers of the economic scene to ring the alarm bells with one of them prepared to take serious odds-on betting that the country will be in the midst of a full-fledged recession by the end of December.

I beg to disagree with this doomsday prognosis for the Indian economic scene. And on this occasion, I happen to be in agreement with the finance minister who the other day was quoted as saying that investment trends remain healthy, thereby implying that investment demand may compensate sufficiently for any weakening of the external demand due to the rising rupee or of domestic consumption demand on account of lower growth in consumer credit. I hope this brings me back in the FM?s book of competent economists! From all accounts, investment plans have not been affected by the cap on external commercial borrowings or the hike in the CRR or a slowing down of the non-food credit growth from the heady 33% in the previous two years to a more reasonable 22% in this calendar year. The slowdown in the IIP for July could well be due to the high base effect as the IIP had risen by about 13.2% and manufacturing by 14.3% in July 2006. Going by the experience in consumer durables, the emerging capacity constraints after about 16 quarters of high growth would seem to explain the slowing down in the manufacturing sector. But these are precisely the sectors like auto, white goods and electronics, where new capacities are on the anvil. Agriculture output could be expected to be in the range of 2.5-3%. Thus, even with IIP growth between 8.5 to 9% and services sector growing at about 11%, GDP growth for 2007-08 can still be expected to be between 8% to 8.5%. This lowering of GDP growth from the highs of the previous year was widely expected, but certainly does not portend a coming recession either by the end of the calendar or fiscal year. The Indian economy is slowing down and that is a pity because I wish we could emulate China?s experience of sustained double-digit growth over two decades, but thankfully we are not facing a recession just as yet.

There are, however, some worrying signs. The continued appreciation of the rupee does not bode well for non-POL exports. A large share of these exports are generated by small enterprises in sectors such as leather, garments, handicrafts, gems and jewellery and so on. These small-scale export units have experienced a double whammy on their bottomlines in the past six months, with the rupee having appreciated more than 8% since April, and interest rates having firmed up by more than 200 basis points. These exporters do not have sufficiently large margins to absorb these cost increases and are thus faced with a loss of competitiveness in global markets. More importantly, the inflation scare resulted in some knee-jerk policy actions like the banning of agriculture and skimmed milk exports and the closure of forward trading. The banning of exports of any commodity or products results in the loss of that market which may have taken substantial time and effort to create. This kind of behaviour is inimical to promoting exports and gaining greater share in global markets. Although we are a large country, we are still not a large enough economy that we can depend almost exclusively on domestic demand to sustain the growth momentum. Maintaining high export growth rate is also important to generate higher employment and modernise the manufacturing sector.

One of the central components of this export promoting policy stance is to prevent the rupee from appreciating further because this aggravates the competitive disadvantage that Indian firms face on account of weak infrastructure and higher labour costs. The strong fiscal performance this year could provide the government with the necessary means to address this.

?The author is director and chief executive of Icrier, a Delhi-based think tank and member of India?s National Security Advisory Board