Is India stumbling into stagflation?
It’s too early to jump to such dark conclusions. But the new industrial production data for March that was released on Monday does make for worrisome reading. Factories across the country cranked out only 3% more output than they did in March 2007. It’s the lowest rate of industrial growth in six years. The new numbers bring back memories of the near-recession in manufacturing during the early years of this decade.
Illustration: Jayachandran / Mint
The latest numbers are partly explained by fact that they were calculated on a high base. But they are far lower than what economists were anticipating even after taking a high base into account. But monthly production numbers do tend to jump around a bit. Too much should not be read from one monthly set.
But taking a slightly longer view does not change the picture. Industrial output growth in 2007-08 averaged 8.1%, down from 11.6% in 2006-07. The industrial slowdown is for real — but most economists continue to say that industrial growth will be more than 7% this year. It is hard to believe that industry will be growing at a snail’s pace, 3%, through this year.
The typical policy response to such a slowdown should be a cut in interest rates. But that’s easier said than done. The Reserve Bank of India (RBI) is constrained by the fact that inflation is at levels not seen for three years. A combination of a slowdown and a spike in inflation is not your classical stagflation.
It is very likely that industrial growth will jump off its current lows and inflation will subside a bit in the months ahead. But the combination of slowing growth and accelerating inflation is still a volatile one. So, while RBI may be forced to temporarily stop tightening the monetary screws, it does not have the space to cut interest rates to boost consumer spending and corporate investment.
Both the government and the central bank stand at an interesting crossroads. They have to choose one of the two paths — accept higher inflation in an attempt to protect growth or sacrifice growth to keep prices under control. It is not an easy choice to make. India needs to keep growing in excess of 8% over the next decade or so to raise employment and cut poverty. But high inflation pinches the poor right now and could also harm investor confidence in the long run.
Our view is that inflation continues to be the bigger worry right now.
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