Growth moderates

A GDP growth of 8.5 per cent for 2010-11 — as against 8 per cent and 6.8 per cent in the preceding two fiscals — makes the global economic slowdown that dragged the Indian economy along in its wake seem like a distant memory. Juxtaposed with an annual wholesale price inflation of 8.7 per cent in April, an 18.5 per cent year-on-year rise in non-food advances by banks and a credit-deposit ratio touching 75 per cent, it would provide some ground for the policymakers' current focus on reining in prices even at the expense of growth. This stance is further reinforced by the fact that the Reserve Bank of India's (RBI) repo or short-term lending rate of 7.25 per cent now — for all its recent measures at monetary tightening — is still well below the August 2008 peak of nine per cent. And that was just before the collapse of Lehman Brothers happened, when high inflation rates and skyrocketing global commodity prices were threatening to derail growth itself. A similar situation exists today, making the case for according priority to inflation control quite compelling, even if it entails some moderation of growth.

Critics of the above view, however, argue that the growth moderation has already set in. This would be apparent if one looks not at the 8.5 per cent GDP growth for the whole of 2010-11, but at the year-on-year increases over successive quarters. These have, indeed, ‘moderated' from 9.4 per cent during January-March 2010 to 9.3 per cent, 8.9 per cent, 8.3 per cent and 7.8 per cent in the subsequent quarters. Moreover, manufacturing growth stood even lower at six per cent and 5.5 per cent in the last two quarters, while gross fixed capital formation — an indicator of investment activity — rose by a measly 0.4 per cent during January-March 2011 over the corresponding period of 2010. Seen with other industry-specific data — a 1.1 per cent year-on-year decline in cement output in April, sluggish car sales and rising stock of unsold built-up homes across major cities — the latest national income estimates would appear to vindicate the critics' fears.

That raises the fundamental issue of timing: Till a year ago, if not less, the RBI and the Finance Ministry were clearly behind the curve in addressing inflationary concerns, attributing them to temporary supply-side factors. Now, the danger is of their being behind the curve on growth and ignoring the ghost of a slowdown lurking around the corner. If the past is any guide, rebuilding investor confidence once dented is never easy and policymakers must, hence, be wary of a mid-1990s-like monetary tightening that could choke growth. The right strategy is to persist with moderate policy rate hikes (which will signal the RBI's continued alertness on inflation) and with no let-up on fiscal prudence (which will help maintain confidence among investors).

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