Duvvuri Subbarao has successfully managed to choke industrial growth. The first set of numbers out this week shows that output at India's factories, mines and power plants in October 2011 actually contracted 5% from a year ago. Over April-October, industrial growth has slowed to a crawl; it is down to 3.5% from a healthy 8.7% in the same period of 2010. The central banker must draw considerable satisfaction that a series of 16 hikes since March 2010, which saw interest rates climb by 3.75 percentage points, has had its desired effect on deflating demand in the economy. What now? Mr Subbarao will, of course, be watching very closely the inflation numbers due on Wednesday before he crafts his monetary policy stance at a Reserve Bank of India review meeting slated for Friday. Wholesale inflation in October 2011 clocked 9.73%, the eleventh month running it has stayed above 9%, and unless there is a significant improvement here, the central banker will have little reason to lower his guard.
Mr Subbarrao's pain therapy, of course, doesn't affect everyone equally, the scope of monetary policy being limited by administered interest rates on the one hand and a large parallel economy on the other. Agriculture and services, which between them contribute three-quarters of India's economic output, are maintaining their trend growth rates. Gross domestic product growth, as a result, has slowed to 6.9% in July-September 2011, from 8.4% a year ago. This is a concern, but nowhere in the league of the bloodbath on the factory floor. Companies are simply not putting up fresh capacity in a season of galloping interest rates and raw material prices. Production of equipment that goes into setting up new plants that churn out the stuff we eventually buy shrank 25.5% in October 2011, a precipitous fall from 21.1% growth in the same month a year earlier. Consumers, likewise, cut hire-purchase of durables like cars that has pulled down the rate of growth from 14.2% a year ago to a 0.3% decline in October 2011. Even when interest rates don't pinch much, Indians have stopped shopping: consumer non-durables like soaps contracted by 1.3% this October. India's famed consumption story is now in jeopardy.
Mr Subbarrao's assessment of his own actions over the past year suggests that policymakers will now need to gear up to give growth a push. And he is relying on the government to assist in anchoring inflation expectations. Decisions on raising administered prices will raise the price line in the immediate future, but can tease suppressed inflation out of the system. Fiscal rectitude can help steer demand from a bloated administration to productive investments by companies and households. Fixing supply bottlenecks in agriculture and infrastructure, likewise, can ease structural inflation, for which monetary policy has no answers.