By Sushma Ramachandran
It's more bad news for the United
Progressive Alliance (UPA) government on the economic front, even as it
looks forward to the general election in 2009. Industrial growth has
dipped to a six-year-low of three percent in March this year. Coupled
with raging inflation, the economic outlook is far from satisfactory at
a time when both Prime Minister Manmohan Singh and Finance Minister P.
Chidambaram were expecting to pat themselves on the back for a great
five-year performance.
After having achieved consistent eight to nine percent growth, along
with buoyant industrial output and a soaring Sensex, it looked as if the
economic duo could do little wrong, despite the weak spot of low farm
output and farmers' suicides.
Things seem to have gone horribly gone wrong lately, as inflation has
reared its ugly head, probably the worst thing that can happen in an
election year. The gloom continues with the latest news about the dip in
industrial growth in March, the last month of fiscal 2007-08. This is a
significant indicator as it can drag down the overall growth rate for
the year. It also points to a continuing slowdown for industry in the
current fiscal, which must be extremely disappointing as the corporate
sector has virtually been on a roll for the last few years. At the same
time, it is the galloping industrial growth in recent years that seems
to have been one of the reasons for the sudden dip in March. The low
three percent growth for the month came on the back of a phenomenally
high 14.8 percent growth at the same time last year. It would have been
difficult to top that level of increase this year.
The fact is that the government is in the proverbial cleft stick. The
Reserve Bank of India (RBI) has been raising interest rates to combat
inflation but this in turn has affected the growth story that could
conceivably wind down in the next few months. For the UPA, of course,
inflation is the priority as this can have potentially deadly
consequences in next year's elections. But by putting the focus on
prices, it has to hope that economic growth does not slow down. The
latest data, however, shows that the RBI's moves to combat inflation by
raising interest rates have begun to take their toll on industry,
including the crucial manufacturing sector. There is a school of thought
that has been arguing for a cut in interest rates to boost growth, but
the RBI has decided to tackle the menace of high inflation and worry
about growth later.
Clearly, it is time for both the RBI and the government to pause and
reflect on their strategy to deal with inflation and growth. High
interest rates have begun to hurt industry and are showing up in the
slower growth data. Such high rates will not only give a push to
inflation in the medium term but ultimately hit the common man in
various ways, including rising cost of home loans. Besides, both the RBI
and the government have repeatedly been emphasising that the major issue
on the inflation front is the need to deal with supply side problems. So
it is for the government to continue its efforts to improve availability
of food products as well as critical raw materials like cement and steel
to douse the flames of inflation.
Also one must not forget that a main reason for rising prices is
globalisation and the fact that the entire planet is facing a crisis
with regard to food and oil. Food prices are soaring all over the world
and, to add to the problem, international crude oil prices have hit the
roof. These are not issues that can be dealt with by the central bank.
Industry is already clamouring for a cut in interest rates to boost
growth, especially in the manufacturing sector. It may be wise for the
RBI to consider such demands favourably over the next few months,
especially if the fiscal and monetary measures already taken yield
positive results and bring inflation below the high seven percent mark.
On the plus side, consumer electronics associations are reported to be
contesting the data on consumer durables in the Index of Industrial
Production (IIP), pointing out that new products like LCDs and laptops
are not included in the index and older items like black and white TVs
are still forming part of the data. There is in fact a feeling in the
consumer durables industry that sales have been buoyant in contrast to
the data released by the government. On the two-wheeler front, however,
manufacturers are agreed that there has been a definite slowdown as
sales have fallen largely due to higher interest rates on consumer
loans. Capital goods have grown by a dismal 2.3 percent.
Most agencies are already revising their growth estimates for 2008-09.
The expectation is that it will not reach the target of 8.5 percent and
could be significantly lower. The overall growth for industry during
2007-08 is now pegged at around 8.1 percent, far lower than the double
digit 11 percent growth recorded in the previous year. In the
manufacturing sector, the situation is even worse with 2.9 percent
recorded during March as against 16 percent a year ago. The government
will clearly have to act fast to ensure that the slump in the
manufacturing sector does not extend well into 2008-09. In case
industrial growth does not pick up in the current fiscal, hopes of
having consistently high growth over the next 10 years could well be
dashed. This is clearly not the legacy that either Manmohan Singh or
Chidambaram want to leave behind; so now is the time for them to revise
their strategies to deal with the many ailments plaguing the economy.
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