The main contributor to the manufacturing slowdown was a decline of over 25 per cent in metal products and parts. Since these numbers reflect the performance of the industry before all the recent price and trade restrictions came into force, they point to the unmistakable fact that demand has been shrinking in response to high prices. Transport equipment, a metal-intensive sector, also showed a decline, but not nearly by as much. By contrast, machinery and equipment, also metal-intensive, grew by 6 per cent during March, taking its growth rate for the year to 9.3 per cent. These numbers provide some reassurance that, despite the short-term adversity, investment activity continues, validating a more optimistic long-term view of economic prospects. Of course, the slowdown is not confined to metal-related sectors. Textiles and garments also declined during March, suggesting that the global slowdown is taking its toll. The exchange rate stabilised during this period, indicating that the slowdown had more to do with sluggish demand than currency movements. Chemicals, another heavyweight sector, also performed poorly, growing at barely over 1 per cent in March. Overall, these numbers confirm the perceptions of a sharp slowdown and, viewed in conjunction with the inflation numbers, raise the spectre of stagflation.
Stagflation is extremely difficult for conventional policy instruments to deal with, since the attempt to deal with any one of the problems tends to exacerbate the other. The appropriate policy response depends on what the immediate future holds for either of these indicators in terms of factors that could spontaneously bring about a favourable change. From this perspective, inflation is the most likely to abate in coming weeks, as food prices respond to both trade restrictions and expectations of a decent monsoon. While the supply response for metals will take much longer, the sharp response of demand to higher prices suggests that slower growth will contribute significantly to lowering prices. Of course, we cannot overlook the huge chasm that has emerged between international oil prices and the domestic prices of key products. Since no one is betting on oil prices going down any time soon, the only option available to the government if it wants to avoid a fiscal blow-out is to use every moderation in the inflation rate to make a small adjustment to the retail prices of these products. Meanwhile, assuming that the outlook for inflation is relatively favourable, policy responses can focus on how to keep growth from sliding too far below the healthy trend that has been established over the last few years. Short-term measures, such as ensuring that the budgetary allocations to various sectors are actually spent, must be combined with much-awaited reforms that will reinforce the longer-term growth momentum.
