The sun is shining

Industrial production growth data for October shows a buoyant economy. Industrial growth was 10.1 per cent, and manufacturing growth was 11.3 per cent. Both were at a seven-year high. Capital goods production, which portrays investment in the economy, accelerated to 19.2 per cent. Textile production is up 24.4 per cent, which may reflect the beginning of the long promised rise in Indian textile exports that would come from the abolition of the “multi-fibre agreement”, the global quota system for textile exports. This performance, in a year with a weak monsoon, bodes well for India’s long-standing effort of reducing its vulnerability to the vagaries of the weather god.

At a policy level, there are two battles being played out in obtaining a more resilient economy. The first is the issue of reducing the vulnerability of agriculture to the monsoon, and the second is the issue of reducing the vulnerability of the economy to agriculture. A lot of effort tends to be put on the first, primarily through increasing irrigation. But the second aspect is the one where great structural change has actually been taking place. Agriculture is now only 22 per cent of GDP, which has helped limit the extent to which the economy gets derailed by weak agriculture. In addition, high growth in industry serves to more rapidly reduce the share of agriculture in the economy. Globalisation, with the rise of exports and imports, has helped the stabilisation of domestic industry. The growth of the services sector has helped strengthen domestic demand, even if farming households are adversely affected. Finally, easy access to credit has helped to stabilise purchases of durables from one year to the next.

The danger in this situation is that of policy complacency. When the economy is doing well, there is a greater likelihood for the PM and the FM to do bad economics. It will become harder to say no to spending proposals. But the time to fix the roof is when the sun is shining. The two big areas where there is an urgent need for progress are: improving the regulatory framework in infrastructure, and doing the Goods and Services Tax, which will result in India becoming a single national market.