For anyone tracking the indices of industrial production,there is little that is surprising in the gloomy findings of the Crisil Research report. For 10 of the last 14 months,the rate of capital formation has been negative in the monthly score card of industrial production. The latest RBI data on credit offtake from the banking sector shows a dip to 16.5 per cent. Combine the two and the result is the same as that thrown up by the Crisil poll. When companies avoid going through with their planned investments and postpone plans for the future,as the poll shows,the implication is that the economy is not only going to suffer now but that the pain will be prolonged. A 14 per cent dip in capital formation in this fiscal on top of a 4 per cent dip in the last fiscal is awfully bad news. The potential silver lining is that the data may finally convince the managers of the Indian economy to look the problem in the eye: the economy is in a period of stress that will last beyond 2012-13. Unless this is acknowledged,the solutions offered will be spasmodic.
Having recognised that,however,the choices are unfortunately not that many. The government can step up public investment and hope that an insulated rural and semi-urban sector will be able to provide a demand that will keep the companies producing goods. Unfortunately,a truant monsoon could ensure that rural income will not be buoyant. This is despite a sustained spell of rising food prices that often benefits the farm sector. Public investment is hamstrung for a Central government facing a huge fiscal deficit. The problem is that states too have worked through their revenue surplus and so the combined Central and state deficit is almost the highest in the world.
Waiting for an RBI rate cut is not an option. The policy paralysis that companies are complaining about has little connection with the RBIs stance on interest rates. The UPA government has to step up to the crisis,solve the legislative logjam. For almost every sector,critical legislation is pending. These need to be cleared,urgently. Ministers must take decisions and not allow bureaucrats to keep the files in an eternal spin. These steps are hard to take,but the time for soft options is over.