The Hindu Business Line : Sagging growth and softer rates

If the January numbers of industrial output hold a policy clue at all, it is for the Reserve Bank of India. With major industrial indicators showing a decline, and manufacturing falling by more than half the growth rate of last January, there are two things the government, and specifically the apex bank, can do: pray for a reverse trend and maintain the status quo in April’s annual statement or send the right signals to shore up sagging spirits in manufacturing right now and still pray for a reversal of fortunes. Why the RBI, in particular, one might ask. After all, it has to fight inflation and, with food and oil prices rising, surely price stability is a worthwhile target for official policy, especially since global inflation is washing ashore with essential oil and food imports adding to inflationary pressures? So far, headline inflation at around 5 per cent is lower than in China, for instance, but it may go up as oil price hikes kick in with the current global trend indicating an upward movement. Yet the RBI is short-sighted in assuming that a sticky benchmark interest rate is the only option.

This is because inflation is not the only problem it has to tackle. With output trends dipping, softer benchmark rates are required to boost consumer demand, with a cascading positive impact on manufacturing. So far, anxiety about excess money supply dictated harder interest rates to temper credit growth. Year-on-year growth in money with the public has, however, declined from the permissible limits of 17 per cent to 14 per cent this February; but foreign exchange assets with banks, despite a marginal decline, remain more than twice those levels, thus contributing to excess liquidity. Managing foreign exchange reserves in ways that address this problem are still to be tested — for instance, higher credit facilities for developing country imports from India; these, however, lie outside the ken of monetary policy. But the RBI can reverse consumer pessimism that is the outcome of its attack on credit exuberance. Softer benchmark rates sooner than later will spur not just spending but industrial growth.

Much as easy interest rates will revive industrial activity to at least January’s double-digit levels they may not sustain it unless accompanied by other measures. This year’s Budget contains fiscal stimuli. The best bet, however, is policies that expand domestic markets and create fresh purchasing power through increased connectivity and public utility investments. This is the burden of a report on poverty for the Planning Commission by Dr Virmani. That is also the lesson we should learn from East Asia facing slowdown threats.

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