India’s growth story has begun to flag with industrial output contracting in October for the first time in 15 years. The big question is whether the long industrial boom since the second quarter of 2002-03 has given way to a bust. True to form, the UPA remains in denial that a recession is stalking the economy, in complete variance with what India Inc believes. When there is a difference in the prognosis of the R-word, can the official policy response really be efficacious?
P Chidambaram, former Finance Minister, responded to an MP’s query on whether there is a recession stating that it had a very precise connotation: a contraction of the economy for two successive quarters. While that is the accepted definition, the US economy has not yet contracted for two quarters. But still it has been declared to be in recession since December 2007 by the business cycle dating committee of the National Bureau of Economic Research (NBER).
The NBER interprets a recession as a significant contraction of activity spread across the economy — a process that lasts more than a few months and is normally visible in production, employment, real income and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. The NBER emphasises various economy-wide measures such as employment, which reached a peak in December 2007 and has declined every month since then, to date US’s recession.
In the Indian context, there are reasons to believe that industrial activity has peaked and a downswing is under way. Nobody knows when it will bottom out. But waiting endlessly for two successive quarters of decline in activity to formally declare the R-word may be pointless. Chidambaram’s remarks that India is nowhere near a recession prompted a riposte from leading two-wheeler manufacturer, Rahul Bajaj “I am unable to sell my vehicles. And that is, to me, a recession!” India’s automobile industry is one of the important industries suffering from substantial negative growth per se. While the US auto giants, General Motors, Ford and Chrysler, stave off bankruptcy, their woes are affecting our component manufacturers who are an integral part of global supply chains.
The bigger picture is that India’s quarterly industrial output since 2002-03 steadily expanded and hit a peak at 12.5 per cent per annum during January-March 2007. The uninterrupted decline since then reached 4.4 per cent per annum during July-September 2008. The rapid expansion over the cycle was due to a robust investment boom indicated by the phenomenal growth in production of capital goods like machinery and equipment. But a downtrend is now underway even in these vital industries that are an important indicator of investment activity in the economy.
What has been the policy response? The government’s fiscal stimulus package sought to boost demand for industrial goods across the board by lowering the Cenvat duties by 4 per cent. To reverse these dismal tidings, policymakers must also pull out all the stops to revive capital expenditure (capex). Across the industrial spectrum, companies are battening down the hatches, reducing costs and laying off staff. At a time when India Inc is going slow on capex, there is scope for more aggressive lowering of interest rates and ensuring that banks have adequate liquidity to lend more to small and medium businesses. When overall inflation is trending down to more comfortable levels below 7 per cent, policy can aggressively shift to promote overall growth. The need is to rekindle what the late economist Keynes called the “animal spirits” — or naïve optimism of entrepreneurs — to improve the investment climate.
The magic bullet is a bold fiscal stimulus package to boost India Inc’s confidence. The government must spend much more than the paltry Rs 34,000 crore, or 0.6 per cent of GDP at market prices, that it has announced. The real need is for five times that amount to restore just one percentage point of overall growth. The government, however, is unlikely to get bolder as it has only a few months in office and its priorities are to ensure its re-election in the national polls in April-May 2009.
The sad truth is that a lame duck government is in power to minister to an economy that needs its undivided attention. It’s time to step up public investment not only for revitalising the stalled national highways programme and port expansion but also for building rural roads and irrigation systems. This is the time to address the agrarian sector, which has had a crucial bearing on the cyclical downturn in Indian industry from 1996-97 onwards for seven long years. The effect of a subdued performance of India’s agricultural sector is on the demand side as more than half the population depends directly or indirectly on it for its livelihood. Crisis conditions persist in this sector: farmer suicides are rising as cultivation is becoming unviable, investments are not picking up, the monsoon is shrinking in spatial coverage etc. Wouldn’t lower agricultural incomes affect demand for industrial goods? Boosting overall demand through massive public investment, thus, is imperative. Is the government listening?