The sharp drop in inflation is the first piece of good economic news over the past few weeks. The government said on Thursday that wholesale prices in the last week of October were 8.98% higher than their level a year ago. Most economists had expected inflation to remain in double digits for many more weeks.
Price pressures are easing across Asia, though for reasons that provide cause for worry rather than celebration. The rich economies are either already in recession or dangerously close to one. The emerging economies of Asia are in the midst of a bruising slowdown. Demand is falling off the cliff in many industries. In that sense, the sharp drop in Indian inflation is also an advance warning of a sharp drop in local demand and overall economic growth.
There are growing signs that India is headed for its slowest growth rate in five years. Industrial production growth in the first six months of this financial year is almost half of what it was in the previous year. A top trade official has said that Indian exports are likely to shrink in October, the first time in five years. Various companies have announced production cuts and are holding back investment plans.
What should the government do? There are no easy escape routes from the rough road ahead. The focus till now has been on interest rate cuts, though we still fear that a country such as India, that has a large current account deficit, puts its currency at risk in the process. This newspaper has been less enthusiastic about lower interest rates till now. But the sharp drop in inflation—assuming it sustains—does make the case for rate cuts more attractive now.
Making money cheaper is unlikely to spur either investment or consumption though, given the fear over the city. The emerging global consensus is that governments will have to borrow and spend to support effective demand. India could have gone down this path, but for the fact that public debt and deficits are already too high for comfort. Credit rating agency Fitch has already warned that a further deterioration in public finances will be an invitation for a ratings downgrade.
That is the last thing that a dollar-starved economy such as ours needs right now.
What is the bigger worry now—inflation or slowing growth? Tell us at email@example.com