The Hindu Business Line : Price cuts and more

Price reductions alone may not spark a resurgence in demand. What is needed is a multi-pronged strategy of monetary loosening and productive public spending.

Not since 1991 has so much initiative been demanded of the Government as now when the economy is caught in a world wide spin-down and just about every indicator of prosperity is reversing direction. Yet, since September, New Delhi has simply assumed that the slowdown had its origins in a liquidity shortage. Successive monetary measures have failed to lift demand; not surprisingly, producers across the spectrum have responded to sluggish consumers by cutting back production exacerbating a decline in manufacturing and overall expansion. At the India Economic Summit in New Delhi this week, policymakers and industry did recognise that the crisis had shifted from a purely liquidity deficit to a more endemic one of demand contraction. Yet the interaction between the two ended in a ping-pong game that neither won.

When the Finance Minister, Mr P. Chidambaram exhorted one industry after another to reduce prices and revive demand, some chief executives countered that the Government cut excise duties to achieve the same end; others hinted that market forces would push prices down in any case. This eventuality is the crux of the problem that policymakers need to address; failing demand pushes down both output and prices, sometimes in tandem. The really effective policy is one that can halt, if not reverse the downward spiral of consumer demand and output. Price reductions alone may not spark a resurgence in demand because often consumers postpone spending in the hope of further reduction. What is also needed in the current scenario of shelved private sector capex plans is a multi-pronged strategy of monetary loosening, fiscal flexibility and productive public spending that helps revive investment demand as a prelude to consumer demand. So far there are only hints of the spending stimulus; the excise duty cuts are being used as bargaining chips, so the monetary measures are left to fight a lonely and futile battle against an economic pessimism that is digging in deep.

The current slowdown has occasioned a further reduction in GDP growth forecasts to between 6.5-7 per cent; in the event it could be even lower by the time the Government bows out. Blaming the world will not help; the domestic slowdown predates the global crisis and is rooted in systemic failures: strained and shoddy infrastructure, and a delivery mechanism for public projects that works shabbily when it does. All these structural weakness that added to costs and prices did not matter when the going was good; now they hurt.

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