The Hindu Business Line : The price of growth

What better signs could the Finance Minister have wished for in the run-up to the next Budget than the stellar performance put in by the growth sectors that have contributed to making the Indian economy the fastest growing in the world? Just about every indicator — from exports to services, foreign direct investments, forex reserves to capital inflows — seems to justify the global impression of a country in a hurry to scale new heights of achievement. What those growth indicators suggest is a level of consistent performance not yet seen — in the years of reforms or earlier. But the cup of joy for the policymakers is brimming over with industry now posting one of its most stellar performances. According to just-released data, in November 2006, the Index of Industrial Production (IIP) had zoomed 14 per cent, the highest in years. Barely a year ago, the Prime Minister was coaxing industry to aim for double-digit growth; the November data would suggest a stirring response from manufacturing beyond the reasonable expectations of Dr Manmohan Singh.

If wishes were horses, the nation would ride more of its people into prosperity than it has done so far. The Prime Minister has often expressed the need for more inclusive growth and, recently concern over the prospect of the needy being hit by rising inflation. That the current run of the Indian economy has catapulted it and many Indians to the global rich club is certainly to be applauded; but not the fact that it has come at a cost that is evident in an alarming escalation of general prices and a failure of monetary policy and fiscal measures to arrest them. Worse, the only sector that could have partially offset the rise in inflation — manufacturing, with an average weight of 63 per cent in the Wholesale Price Index — has added significantly to the rise in headline inflation by its own price index rising to 4.8 per cent in November up from 1.7 per cent in July 2006.

Whether or not the inflationary tendency in manufacturing should alarm policymakers can be gauged from the early corporate results suggesting robust earnings. This might tempt one to ask, `if the market is able to bear the price spikes, why worry?' The problem is precisely with the market, restricted as it is by a stagnant agriculture and sluggish core sectors, both of which will not bear inflated prices; neither will global markets to which firms can turn in the case of limited domestic markets, as in China. Prices have to decline and a start may come after a review of, and hopefully decrease in, fuel prices. But long-term measures for growth are required if the euphoria over growth is not to be short-lived.