The December numbers for the Index of Industrial Production, which were published yesterday, suggest that the economy is decelerating rather sharply. A year-on-year decline of 2 per cent in the general index and 2.5 per cent in the manufacturing component appear to be at odds with the rather reassuring advance estimates for GDP growth, which were released earlier in the week. The sharp decline is partly attributable to a base effect. In December 2007, the index increased by 8 per cent over the previous year, significantly higher than in preceding and succeeding months. However, even after accounting for that, the decline is greater than was expected. The pressure on policymakers to do something quickly will clearly mount. As it is, expectations that the interim budget to be presented to Parliament next Monday will contain significant stimulus measures are mounting. This is despite the fact that convention precludes a fifth-year pre-election budget from doing anything dramatic, and underscores the desperation that is now gripping the economy. The Reserve Bank of India, which decided to hold steady on interest rates in its January announcement, will presumably be induced to change its mind in the wake of these numbers. In any event, interest rate cuts were anticipated once the government’s borrowing requirements were known, so there is a strong likelihood that cuts will follow soon after the interim budget.
At the industry segment level, the mutually reinforcing global and domestic slowdowns are clearly visible. Exports have been on the decline since October, although the December fall was relatively modest. This manifests itself in positive growth in the textile products segment, but sharp declines in leather and leather products (minus 11.4 per cent) and jute products (minus 66.4 per cent). The cotton textiles segment also declined by over 6 per cent. From the perspective of domestic drivers, tight credit conditions have apparently had an impact on transportation equipment and parts, which declined by almost 18 per cent. Machinery and equipment also declined by over 4 per cent, reflecting the hostile investment climate. Chemicals, the largest single segment in the index, declined by over 7 per cent, which is an indication of how broad-based the deceleration is. In terms of the use-based classification of products, consumer durables declined by 12.8 per cent, a strong indication of declining consumer confidence, while non-durables declined by a marginal 0.1 per cent.
It is evident that the combined impact of adverse global and domestic factors is large and likely to persist. Policy responses will eventually work but until then, a mutually reinforcing spiral of falling confidence and declining production is evident. On this reasoning, it is essential that policy actions are taken to reverse the ebb in confidence. A first step towards this is a frank and realistic assessment of the magnitude of the problem and the capacity of the government to address it. That is what the interim finance minister must do in his speech on Monday.