Alone,and mistaken

The decline in industrial production by 2.3 per cent compared to last year,as revealed by the IIP data,is a cause for concern. Those looking at the stock markets numbers alone might have thought that the economy is looking up. But the real economy data has,however,continued to be weak for nearly 6 months now. Industrial production figures have been dismal for the last 4 months. The poor performance of production is no longer attributable to a crisis in credit,leading to shortages of trade credit or working capital. Along with the sharp decline in exports and poor investment outlook,the bad numbers are a manifestation of contracting demand.

To prevent the downward spiral into which such contraction could thrust the economy,it is crucial to face the issue squarely. If policy-makers continue to believe that they have done their bit and choose to passively wait for the economy to respond,the decline could be followed only by further decline,and huge pain could lie ahead. For many weeks,policy-makers argued over the technical distinction between a recession,as seen in the United States,and a growth slowdown,such as India would witness; and they used this distinction to argue for keeping interest rates much higher in India than in the rest of the world. Even after being confronted with negative IIP growth rates,the argument was being made that monetary policy has cut rates as much as it should,and now it is time to wait for banks and the corporate sector to respond. Interest rates were not cut aggressively even after the abysmal decline in industrial production figures started becoming known,from early 2009 onwards. While central banks all over the world adopted the approach of doing all they could,in India,instead,arguments were heard for why not to cut rates any more.

Monetary policy is not shackled by the election code. Instead of waiting for the formation of a new government,and then for the new government to figure out a strategy for reviving the economy,the RBI must quickly respond to the latest dismal numbers and cut rates sharply. This could help prevent some of the gloom that may set in following such production numbers. In the last few months,despite being surrounded by bad news from almost every quarter,Indian producers and consumers have remained largely optimistic. This optimism should,however,not be taken for granted.