Over the horizon

Year-on-year industrial growth has now been in negative territory for three consecutive months. This is not a commonplace event in India: in the downturn of 2000 and 2001,the worst values recorded were still positive. To find three consecutive months with negative IIP growth we have to go back 16 years,to February-April 1993. There is some talk of green shoots of recovery. But there are also the lessons of economic history: economies rarely bounce back lightly or quickly from a business cycle downturn. India is in a particularly difficult phase of political uncertainty. It is not clear that an effective economic policy team will be in place until after the coming elections. When it is,it must keep even the gloomiest forecasts in mind.

These difficulties need to be seen in the context of a daunting international environment capital flows into India having dropped to roughly zero in November-December 2008 and a massive fiscal deficit. It is hard to dispel the sense of India being back in a macroeconomic crisis. This slowdown is likely to be worse than what was experienced from 1997 to 2002; it is starting to look like the early 1990s. An important element of the story is private corporate investment,which was 16 per cent of GDP in 2007-08. If this drops significantly,then the economic outlook will turn even gloomier. Conversely,if private corporate investment does well,this could lead to a resurgence. There are two experiences in the past of a policy-driven resurgence in private corporate investment: these are the reforms of the early 1990s,led by Narasimha Rao,and the reforms from 1999 to 2002,led by Vajpayee. In both these cases,long-standing cynicism about Indias ability to reconsider entrenched wisdom was proved wrong by far-reaching economic reforms which put the economy on the path to prosperity. This induced optimism about Indias long-term growth prospects,which then ignited an investment boom led by the private corporate sector.

The new government,which will take charge by late May,has to now replicate that strategy,of putting the economy back on track through a resurgence of private corporate investment which is inspired by a far-reaching economic reforms programme. Meanwhile,interest rates need to be lower after all,expected inflation is now at zero.