Take bold decisions to avoid economic doom

Official statistics released on Thursday show that India’s factory output contracted 1.8 per cent in June compared with 2.5 per cent growth in the previous month, further reconfirming the fear that economic growth may slow to less than 6 per cent in the current fiscal. Industrial production in the first quarter of the current fiscal year is thus lower than what it was in the first three months of the previous fiscal year, a clear indication that corporate investment continues to dry up. The slump in factory output comes at a time when a weak monsoon is likely to harm farm output as well. It is no wonder that economists have been busy reducing their estimates of Indian growth this year. Many of them are already saying that India will only grow at around 5.5 per cent this year, with Citibank citing a 4.9 per cent in case drought conditions worsen.

As things stand, policy-makers are in a bind. The Reserve Bank of India cannot stimulate demand by cutting interest rates at a time when consumer inflation is still close to double digits. Union finance minister P Chidambaram has little room for a fiscal stimulus because of the massive deficit he has inherited. He has promised a stable and fair tax regime to regain investors’ confidence, but unless the government kick-starts stalled economic reforms, it would not be easy to put the economy back on a high growth path and stabilise government finances.

The spin doctors in the government will surely keep explaining it away as the inevitable result of troubles in the global economy. Even they must realise that a large part of the problem is because of several years of poor macroeconomic management combined with the total disinterest in economic reforms. The situation calls for an immediate reset of the policy matrix. India can no longer pursue a policy of deferred decision-making if it has to bring back the growth momentum. Instead of resorting to populist schemes like free mobiles for people below poverty line to divert attention from its failures, the government should be ready to take hard decisions in consultation with other parties, including Opposition.