The drop in consumer inflation and low index of industrial production, particularly the strong drop in manufacturing, sparks off the debate on growth vs inflation. Former RBI governor Raghuram Rajan, who was more a “people’s governor”, had preferred to focus on inflation as he felt it was inflation which hurts the poorest most, but those in the government think otherwise, as in their view growth means employment. Though many share this view, that IIP doesn’t necessarily reflect a true picture of the economy. The fact that industrial production is the lowest in eight months is a matter of concern. Today there are several new areas of business in contrast, but still manufacturing matters in a country where 10 million young people enter the job market every year. One wonders if services are growing fast enough to absorb these new entrants. Manufacturing is the sector that provides the maximum jobs. The fall in capital goods production reflects an economy that is not too healthy. One of the explanations for this fall is that investments have not taken off as there is excess capacity. This is puzzling as this story has been going on for a while. Even “Make in India” seems to be more a slogan of hope at the moment. Perhaps Prime Minister Narendra Modi or his ministers should explain why this is so, and how the situation can be rectified. If the economy doesn’t grow, there could be unemployment and this could lead to social tensions. Young people could be drawn to terror groups, which pay well and make all sorts of promises.
In this scenario, interest rates being brought down can play only a marginal role. The clamour to bring down interest rates is that it will spur investments, but if investments are not taking off due to excess capacity in various sectors, then it means new ideas are needed to revive manufacturing. Perhaps the monetary policy committee set up by the government and the RBI will look into this complex issue. With the next policy due in October, it is hoped that the government and the RBI will not pussyfoot over this as the committee is yet to be fully constituted, with representatives from both sides. RBI governor Urjit Patel will have the last word, and it would be interesting to see Dr Patel’s stand. He has been credited with shifting the RBI’s focus towards consumer retail inflation, in contrast to wholesale.
