Factory output shrank in December, ending a dismal three quarters of 2012-13 when industrial growth crawled at 0.7%. The official estimate for growth of the gross domestic product in 2012-13 is 5%, and this projection was arrived at before factory data for the last quarter came in. For three years running, prices have been on a gallop despite efforts by the central bank to choke off inflation through aggressive interest rate hikes. But with the government running a prodigious spend-and-borrow programme, Indian industry has effectively been crowded out of the credit market. The index of industrial production bears this out. The Reserve Bank of India (RBI) can't be faulted for what it did: doubling the interest rates between March 2010 and October 2011. Without a parallel reduction in government spending, growth was bound to be a casualty.
The policy reversal that is needed to revive industrial activity cannot be grudging. The RBI reduced interest rates by a quarter of a percentage point from 8% in January, but further cuts will be calibrated to the decline in inflation. Factories, mines and power plants will need more than interest rate cuts to regain their growth momentum. Production of equipment that goes into setting up new plants that churn out the stuff we eventually buy has shrunk by 10.1% in April-December 2012-13. Consumer goods like cars and soaps also saw their rate of growth halving from 5.7% a year ago to 2.6% in April-December 2012-13.
The cues for an industrial turnaround will have to come from the budget to be presented later this month. For one, finance minister P Chidambaram will have to drastically prune borrowing to let industry access capital that has dried up for everyone apart from the government. Spending, which is being pummelled by slow income growth as well as by high interest rates, will also need to be revived by tax tweaks. Mr Chidambaram has committed himself to medium-term fiscal correction and the Direct Tax Code - with wider tax slabs and rationalised exemptions - is being given final shape. Between them, they may be able to inject much-needed investment and consumption demand into the economy.