Is this the exit note?
The temptation to battle rising food prices through demand compression is strong, but it remains a risky tool to tackle supply shortages even if they threaten to spill over into core inflation.india Updated: Feb 08, 2010 23:28 IST
Government projections of 7.2 per cent growth for the economy in the 12 months to March 2009 underline that India’s industrial recovery is decidedly V-shaped. Factory output this year should expand 8.9 per cent, nearly thrice as fast as last year. Mining and energy, too, are poised to grow 7.1 per cent and 4.3 points higher than a year ago, adding cheer to a happy industrial picture. In fact, services and manufacturing appear to have regained their pre-crisis momentum that is oblivious to a drought-inflicted shrinkage in farm output. Decelerating government expenditure is a sign that monetary and fiscal stimuli have worked — every non-farm sector apart from banking is growing faster than last year — and now it is a matter of how hard we need to hit the brakes.
Is the chapter on a grave global catastrophe closed in India? Not yet. We imported the financial crisis through
our manufacturing exports, which have still not recovered.
In 2009-10, India’s merchandise exports will just about reach the absolute amount they did in 2007-08. The share of exports in the gross domestic product has shrunk from 24.5 per cent to 19.3 per cent in the space of a year, while the fall in
imports is even steeper from 30.7 per cent to 23.8 per cent. Consumption and investment demand, too, are yet to match up to their share of last year’s national income. This slack is being offset by a shrinking trade gap. We are not done with the world’s problems yet.
The overall weakness in domestic demand must temper decisions on exits from expansionary monetary and fiscal policies. This year’s crop failure will also have to be factored in.
The temptation to battle rising food prices through demand compression is strong, but it remains a risky tool to tackle supply shortages even if they threaten to spill over into core inflation. Luckily, both views find support in India’s policy-making environment. The central bank has signalled its intent to lower inflationary expectations by withdrawing some of the liquidity it pumped into the system last year, while the government is speaking of a calibrated exit from tax giveaways. Fiscal correction is widely expected to dovetail into tax reforms that hold out the promise of making India a unified market for goods and services. This is certainly not the time for jumpy trigger fingers.