The latest index of industrial production (IIP) numbers, showing growth for September at a two-year-low of 1.8 per cent, confirms what is by now obvious: The slowdown is real. It is hard to think that the Government is aware of it, if judged purely in terms of policy response. There are perhaps reasons — at least from the Reserve Bank of India's (RBI) side — for the silence, unlike in 2008-09 when it was quick to respond. Back then, the growth fell all of a sudden. The first half of that fiscal actually saw an average year-on-year IIP increase of 8.1 per cent. Then followed the global economic crisis, which resulted in an industrial slowdown from October and seven consecutive months of negative growth between December 2008 and June 2009 — making it a proper textbook ‘recession'. This time round, it has been a comparatively gradual affair. The April-June quarter recorded a fairly decent average growth of 7 per cent. Since then, it has declined to 3.8 per cent in July, 3.6 per cent in August and 1.8 per cent in September. It is this gentle slide — combined with a wholesale inflation of 8 per cent-plus persisting over 21 successive months — that has confused policymakers, especially the RBI. Its monetary tightening actions have, in the end, dented growth without really helping to “anchor inflationary expectations”. The only consolation is that there is just a ‘slowdown' and no ‘recession' as yet.
Tempering this minor satisfaction, though, are two realities. The first is that, unlike in 2008, there is not much fiscal headroom today to pursue Keynesian expansionary policies. The Centre's revenue collections are down, made worse by the limited options for borrowing: Last week's auction of a 13-year paper devolved on primary dealers despite a 9.15 per cent yield offer. Secondly, in 2008, the ruling United Progressive Alliance (UPA) enjoyed a fair amount of credibility among investors and the wider public. That's why the 2008-09 recession, which was primarily about liquidity and demand constraints, was amenable to traditional monetary and fiscal quick-fixes. The current crisis is bigger — one of ‘confidence', which has dried up because of a Government that no longer has the stomach for taking major policy decisions.
That being the case, the best way out now is to work on the second part of rebuilding confidence. It requires taking immediate action on a host of fronts: Granting firm coal linkages to power plants best placed to achieve early completion; framing policies to enable bleeding telecom or airline firms to exit easily (including selling out to foreign players); decontrolling sugar and urea; and getting major financial bills on insurance (allowing 49 per cent foreign direct investment), pension (according statutory status to the regulator) and the direct tax code passed in the coming winter session of Parliament. These measures would go some way in restoring investor confidence.