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Signs of a slowdown

Recent official economic data reinforce the perception of a slowdown. Industrial production increased by just 3 per cent in March 2008, the lowest in six years. For the entire year 2007-08, the growth rate is estimated to be 8.13 per cent, more than 3 percentage points below the previous year’s figure of 11.6 per cent. Though the Planning Commission has maintained that industrial growth being at the lower end of the anticipated band of 8-8.5 per cent was entirely exp ected, the drop in the rate has several negative connotations for the macroeconomy. In the recent past, strong performances by both industry and services had made possible a GDP growth of 9 per cent. The decline in industrial growth will most likely cause a downward revision in official GDP estimates for 2007-08. In its advance estimates, the CSO had placed the GDP growth at 8.7 per cent. Obviously the scaling down of estimates for 2007-08 will influence the prognosis for the current year as well. The RBI’s forecast of 8 to 8.5 per cent growth seems optimistic in this context. Most other professional forecasters have been less upbeat. Their caution seems to be corroborated by the news of a perceptible decline in the rate of growth in six core infrastructure industries, including coal, electricity, and petroleum refinery products.

There are inherent limitations in extrapolating past data related to a specific month or even a whole year to arrive at meaningful conclusions on the state of the economy. For instance, in March 2007, the base month for the latest IIP figures, the rate of growth was as high as 14.8 per cent. The steep fall a year later might well seem to be an aberration. However, some of the factors responsible for the latest industrial slowdown such as high interest rates and escalating raw material and input costs will remain over the medium-term. Thus a sharp rebound in industrial growth seems unlikely for now. Moreover, with WPI inflation touching 7.83 per cent for the week ending with May 3, there is going to be no let-up in monetary tightening. In another context, a softer monetary stance could possibly have been used to reverse the industrial slowdown but now it will only stoke inflationary expectations and is therefore ruled out. Global oil prices continue to rule at record highs. The government is faced with a mounting subsidy bill. The rupee, which had appreciated sharply, has recently come down in relation to the dollar. Evidently, it will be hazardous to judge the performance of the economy as a whole from projections of past data, given the uncertainty and the new factors that seem to be at work.

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