The Hindu Business Line : Slipping confidence

Much as the Government may want the nation to share the excitement it felt last year about the economy's prospects for a sustained growth of 9 per cent, there is increasing evidence that the thrill, as they say, is gone. Policymakers in the rarefied atmosphere of secretariats and ministry offices may continue to exhibit an irrational exuberance about the growth prospects in the face of mounting problems, often of their own making, but producers, consumers and bankers know different. They can feel the impact of policies and their sentiments are shaped accordingly. In the last quarter of fiscal 2006-07, the economy came to the full realisation that inflation had to be tackled and that the only effective instrument that New Delhi would use was monetary policy though supply constraints kept the prices on the boil. The impact of successive interest rate changes is now reflected in falling business expectations.

A National Council of Applied Economic Research survey of business expectations for January-March 2007, published in `Quarterly Review 2007 Business Expectations Survey', notes that the Business Confidence Index (BCI) for the period slipped some 4 percentage points over the previous quarter. That drop may appear insignificant; but the fact that the BCI fell at a time when policymakers were gung-ho on growth is telling. Clearly, the impact of monetary policies is being viewed differently; while the Government thinks of a tight money policy as an essential therapy for the "overheating", business sees it as tightening the belt that will only choke growth. The fact that the BCI has fallen across industries save the capital goods sector, and that no region has been spared the fall with steepest being in the western and southern region, the hubs of the growth process, indicates the sense of pessimism that affected business in that quarter. While such sentiments do not necessarily translate into any real downturns in economic indicators — in fact, these are all expected to be positive — it is telling that the survey's Political Confidence Index too has fallen. Declines in both the indices can affect investments if perceptions of a slowdown begin to grip business. At any rate, demand will begin to taper, as money gets dearer. In their zealous attempts to beat inflation, policymakers may have landed a body blow to the economy.

To lighten its crushing effect, New Delhi should step in with infrastructure and rural development spending to keep the growth stimulus from slacking in the medium term. Public spending through budgetary allocations for critical sectors — power, for instance — would pre-empt possible deflationary outcomes of the Reserve Bank of India's monetary measures and maintain the growth train on track.