Restoring confidence

One swallow, it is said, doesn't make a summer. But how about two, if not three? When the Central Statistics Office (CSO) came out with industrial output data for July that showed year-on-year growth touching a 21-month low of 3.3 per cent — the figure was later revised to 3.8 per cent — it could have been viewed as a one-off thing. This was more so, given the fact that the same month of the previous year had registered a 10 per cent increase, resulting in a high base. But the CSO's latest index of industrial production (IIP) numbers for August, released on Wednesday, point to a second successive month of tepid growth, at 4.1 per cent. Moreover, the fact that it is on an equally low growth rate of 4.5 per cent for August 2010 makes the high ‘base effect', too, irrelevant. If one were to additionally factor in the 8.7 per cent negative excise collection growth in September — the first time since April 2010 — the evidence is reinforced thrice over.

All this is definitely indicative of a slowdown cementing itself, even if it might not be of the order seen in 2008-09. That period, according to CSO's revised IIP series with 2004-05 base year, recorded seven consecutive months of negative industrial growth from December 2009 to June 2009 — making it a textbook recession, defined as a production decline over two or more quarters. The current slowdown, hopefully, will not be as bad. The downside, though, is that the last time round, the Government had some fiscal legroom to keep the economy going in the face of a global demand contraction. Equally important, it had a reasonable level of credibility both with the industry (despite the Left's overbearing influence) and the wider public (borne out by the 2009 Parliament poll results). Today, it has neither. With revenue pressures already leading to nearly Rs 53,000 crore of additional borrowings by the Centre, the scope for Keynesian counter-cyclical policies is rather limited. As regards credibility, the less said the better.

The current crisis is one of confidence more than anything else — in the Government's overall ability to govern, take bold decisions, effectively mediate conflicts between various stakeholders, and so on. This is evident in its dithering over Lok Pal and Telangana, a totally directionless Mining Bill, and the proposed new telecom ‘policy'. What is to be done? To begin with, the Reserve Bank of India should put a stop to any further increase in its policy rates. Further monetary tightening may only exacerbate a slowdown. But the more important thing is for the Government to get back into the business of governance and restore investor confidence.

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