Not Quite A Recession

Does that mean the prospects for the next six months are non-recessionary? The answer is no, because even if the demand curve for the whole economy stays more or less where it is, the demand curve for entire industries can begin to shift downwards. That this is what is beginning to happen is borne out not just by the reading of the situation by S S Tarapore, the just-retired deputy governor of the Reserve Bank of India, but also by the recent survey by the Confederation of Indian Industries. This shows the output of 13 industries (auto, cement, steel, construction, drugs, electronics, consumer electronics, fertiliser, machine tools, crude oil, petrochemicals, synthetic fibre and textiles) slowing down in the second half of this financial year. For the year as a whole the rate of industrial production is likely to be less than last year's 12 per cent.

 

Should the government read this as a recession and take the appropriate pump-priming measures? The answer has two parts. One is simply that, given its poor fiscal health, there is not much that fiscal policy can achieve. So pump-priming is out. The other is that monetary policy also will not help revive industrial demand because credit availability is not the problem any longer. Indeed it hasn't been since March.

The problem, if it is one at all for the government, lies where Mr Tarapore suggested in an interview with Business Standard published this week: in a cyclical downturn. Indian industrialists are getting the first taste of this, since previous declines have not been part of a cycle. They will have to get used to it. In short, there is no need to loosen monetary policy. That way lies a more general danger: inflation.