September showtime

At the Economic Editors’ Conference, Finance Minister P. Chidambaram observed that both industry and services are expected to grow at 10 per cent in 2007-08. Hearing this from the finance minister is heartening, and certainly 9 per cent-plus growth would require this. But we also need to look at the latest figures. Admittedly, the Index of Industrial Production (IIP) is an incomplete indicator of industrial performance, since not all industry is captured in the index. It is, however, significant that IIP growth this September was 6.4 per cent as compared to 12 per cent in September 2006, and 9.2 per cent in April-September this year. This seems to suggest that in ’07-’08, industry is not performing as well as it did in ’06-’07. One must also remember it is manufacturing that has so far been clocking spectacular performances, not non-manufacturing segments like electricity and mining.

But hold the pessimism. It would be sensible to probably wait for another month’s figures before letting it through the front door. Why has the slowdown occurred? Three possible answers suggest themselves. First, there is impact of interest rate hikes, a continuous upward trend since the UPA government came to power. This doesn’t seem to have hurt investments yet, financed through either equity or borrowing; and the reason has a lot to do with the way investments are financed now, compared to say 1997-98. Nevertheless, consumer expenditure seems to have been adversely affected and, in September 2007, consumer durables declined by 7.6 per cent while consumer non-durables grew by only 2.2 per cent. Second, manufacturing growth has been driven by exports and export slowdown is palpable, thanks to the appreciation of the rupee. Third, there is an element of global slowdown and inevitably, with the opening up, Indian growth is now more susceptible to global changes. There is thus the endogenous cyclical and rupee appreciation strand and the endogenous interest rate hike strand. Pressures of rupee appreciation will certainly continue, thanks to capital and net invisibles inflows, as will global cyclical phenomena.

Hence, the key question remains one of interest rate softening, not just one of leaving interest rates intact. In all probability this is exactly what RBI and North Block will do and reverse the downtrend.