Realism on growth

Better to remain within inflation and deficits barrier

Heavens have not fallen with a sharp fall in the monthly Index of Industrial Production. Relax! As if quarterly data were not difficult enough to generate and interpret, policymakers, investors and analysts have to now grapple with a new slippery customer called monthly data. The widely reported comment that “volatility” of monthly data has increased does not acknowledge the fact that such monthly data are of recent origin and as yet highly unreliable. This is not to deny that the November 2010 numbers for the Index of Industrial Production, that show the IIP growth slowing down to a low of 2.7 per cent, month on month over November 2009, are a cause for concern. Indeed, the seasonally adjusted month-on-month growth rate has also come down. However, cumulative growth during April to November 2010 over the same period in 2009 shows the IIP growth rate improving from 7.4 per cent to 9.5 per cent. The slowdown that is quite clearly occurring is partly due to what economists call the “base effect”, the impact of the sharp recovery in the economy’s performance in the second half of 2009, post-election, and partly on account of measures taken, especially on the monetary policy front, in response to recent concerns about “over-heating” that may have slowed down demand. However, till better quality data are available, it would be wrong to jump to conclusions about the economy entering a phase of stagflation or growth-tanking.

 

There are several economic indicators that bear close watching and policy intervention to stimulate growth without further exacerbating inflation is called for. This much has been acknowledged both by the central bank and by macro-economic authorities in New Delhi. However, to jump to the conclusion that a deterioration in the current account deficit, the fiscal deficit, food price inflation and industrial growth data amounts to a stagflationary crisis is not just premature but erroneous. Wrong policy conclusions can easily get drawn on the basis of such hasty and alarmist conclusions that, in turn, may hurt growth or further exacerbate inflation or a balance of payments problem. Hence, not jumping to medium-term policy conclusions based on short-term data is advisable.

Far too many commentators on the economy seem to think that the Indian economy is an island unto itself! Several global trends are impacting the Indian growth process. There is a global resurgence of commodity price inflation even as growth prospects in key economies, including Europe and China, remain uncertain. There is, however, an important lesson that policymakers, investors and analysts must draw from the growth and inflation experience of the past decade. This is that at prevailing rates of capital, land and labour productivity, and given the infrastructure bottlenecks and other inefficiencies, 8 to 9 per cent growth may well push the economy beyond an “inflation barrier growth rate”. And, given middle-class sensitivities to “double digit” inflation, policy intervenes to cool down growth with attendant consequences. It is possible the economy is at that point once again. If 2010-11 ends with 8.5 per cent growth and 2011-12 can look to 8 per cent, with inflation closer to 6 per cent, current account deficit closer to 3 per cent and the Centre’s fiscal deficit below 5 per cent, there is no need to panic! Given the constraints, 8 to 9 per cent growth is a more realistic long-term growth aspiration than 10 per cent.