Factory output shrank in March, ending a dismal year when industrial growth crawled at 2.8%. The official estimate for growth of the gross domestic product in 2011-12 is 6.9%, and this projection was arrived at before factory data for the last quarter came in.
For two years running, prices in India have been rising faster than economic output, despite a strenuous effort 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 will be grudging at best. The RBI reduced interest rates by half a percentage point from its peak 8.5% in April, but further cuts will be calibrated to the decline in inflation. The government has pegged its borrowing requirements for this year at Rs 5.1 lakh crore, just about the same as last year.
Factories, mines and power plants will need more than interest rate cuts to regain their growth momentum of a year ago. Companies will have to be prodded to set up fresh capacity. Production of equipment that goes into setting up new plants that churn out the stuff we eventually buy shrank 21.3% in March 2012, and by 4.1% over the full year.
Consumer goods like cars and soaps also saw their rate of growth dipping from 14.2% a year ago to 0.7% in March. The climb will be slow, as finance minister Pranab Mukherjee has hinted, despite the able ministrations of industry minister Anand Sharma, who is in a hurry to apply band-aid.
The political fallout of the growth and inflation numbers should not be overlooked by the UPA. Real incomes of Indians are falling when inflation overtakes growth. The government’s welfare agenda is sorely undermined when per capita income at constant prices declines.
Growth is as much an election necessity as is taming prices. Reviving a faltering economy, however, needs concerted political will, which the ruling coalition seems unable to drum up. Be it in axing subsidies like those on fuel to getting allies to support financial sector reforms that can draw in fresh foreign capital.
Reforms needed to bring the economy back to 9% growth will, along the way, also ease the latent inflationary pressures that are denting the UPA’s ‘inclusive’ credentials.