The business mood is gloomy in India this week as fears about the economy slowing gather pace. An announcement Wednesday that year-on-year industrial growth dropped by more than half in January – 11.6% recorded a year ago to 5.3% – pushed the stock market into the sharpest of today’s Asia falls. The key Mumbai Sensex finished 4.85% down at 15,346, almost the lowest for six months and far below the dreamy 21,000 levels of just two months ago.
Finance Minister Palaniappan Chidambaram said – inevitably – that one month’s figures should not be seen as too depressing. That is the sort of comment that politicians make when things are going badly, but rarely say when they are going well. And he would not want to say anything else just 12 days after announcing his budget, which did not seem to acknowledge serious declines.
Of course Chidambaram is right, up to a point. But the figures continue a trend that has built up over many months, with tight monetary policy and high interest rates pushing average industrial growth down to 8.7% between last April and January, compared with 11.2% a year earlier.
Especially worrying is a decline in capital goods production trends with growth down to 2.1% in January compared with 16.3% in January 2007. Consumer durables growth has gone into a negative figure of minus 3.1%, pushed by a decline in sales of motor scooters that weigh heavy in the statistical model.
This is not good news for a government that is looking for an opportunity later this year to call a general election ahead of the possibly final date of May next year. November is being talked about as a possible date – after the fortunes of the Congress Party, which leads the current coalition government, have been tested in state assembly elections in Karnataka and perhaps elsewhere.
With highly experienced officials such as Chidambaram and Prime Minister Manmohan Singh in key top positions, the government is expected to produce a buoyant economy that benefits the poor and boosts business. That image might be hard to sustain as the year progresses, especially with inflation at around 5%, which is close to the politically uncomfortable figure of about 6%. Slowing growth might help to curb some prices, but inflation has a momentum of its own, driven by sharp increases in the cost to consumers of basic foods such as rice, wheat and edible oils – all items that touch the pockets of the poor.
The government is well aware that, like its predecessor, it will be judged in the election by how the poor, and especially the 75% of the population in rural areas, have fared. That is why Chidambaram’s budget contained loan wavers and concessions costing an estimated $15 billion over three years for 40 million farmers who have defaulted or are having serious problems with repayments.
The overall effect of this idea is now being questioned, partly because it could encourage others to default and also encourage state government to introduce similar costly concessions.
But the key criticism is how the tens of millions of farmers who have struggled to keep up with payments, and so do not qualify for Chidambaram’s largesse, will feel when they see defaulters being baled out. That could generate a bigger anti-Congress vote than the one that might be generated by the loan write-offs.
It’s never easy to help the poor in India. More than half the aid that is pumped down to rural areas is lost and never reaches its intended destinations. And now this new initiative could misfire – just as the pace of inflation increases and growth slows.