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BW Businessworld

Changing Orientation

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In September, the year-on-year rise in industrial production was a mere 1.9 per cent. The figure gives another indication that growth in this sector is slowing down rapidly. From 7.9 and 5.2 per cent in the past two financial years, growth in April-August this year fell to 1.6 per cent. Output of textiles and garments fell in absolute terms, as also of television sets, watches and chemicals. The index shows a rise in motor vehicle output; but recent months have shown drastic falls in their output. Industry is in a downturn, which is likely to get worse.

Another indicator of the slowdown is the acceleration in export growth. The trade figures are less up-to-date than those of industrial production, but the figures for April and May show a 50 per cent rise in exports. As domestic demand slumps, producers are turning to markets abroad. Textile exports increased 24 per cent, and garment exports 30 per cent. But these are modest figures compared to engineering goods which more than doubled, thanks to vehicle exports. Industry is adapting itself fast to the domestic slump.

Agricultural exports also rose 68 per cent in April and May. Agriculture would adapt itself even faster if the government's policies did not create such strong disincentives. One of the exercises in the latest quarterly economic review of National Council of Applied Economic Research was to calculate how much faster food prices have increased than prices in general. In 2009-10, they rose 8.7 per cent more slowly. In 2010-11, they rose 1.8 per cent faster. In the current year, they have risen 14.3 per cent faster. Nothing could make it clearer that food prices are racing ahead of general inflation. Fruit and edible oils lead the field; animal products — milk, dairy products, eggs, meat and fish — also show high rates of inflation. They are all products with a high income elasticity of demand. But the rise in their prices also signifies insufficiently high elasticity of supply. Land is a most versatile factor of production; it can be shifted within months from production of one crop to another. Animal products and fruit are amongst the most profitable products. But farmers are so content with growing wheat and rice that they ignore the opportunities offered by these lucrative alternatives. They like the secure market and pre-announced prices in wheat and rice. If the government must reward farmers just for being farmers, there are better ways of doing so. A simple way would be to give a subsidy per acre, irrespective of what crop is grown; it will remove the bias in favour of cereals. The subsidy does not have to be the same for all land; it may be varied according to the land's potential output. It may be higher per acre of wet land than of dry land, and higher for fertile than for less fertile land. But it is really important to get away from the present scheme, which wastes the country's land resources and makes agriculture less capable of competing in the world. Persistent inflation in promising crops is just one byproduct of the policies.

Import growth has been surprisingly strong at 44 per cent in April-May; but it is not industry that is leading imports. The fastest rise was in imports of gold and silver, which almost tripled. This is confirmed by imports from Switzerland, which happens to be India's biggest conduit for gold. It may seem strange that people should be buying jewellery in bad times; but that has been the tradition in India. Indians have hoarded gold as insurance against bad times; they are doing so just now.

It may be expected that the worsening global economy would lead to a deterioration in India's balance of payments; but there are no signs of such worsening till now. The trade deficit in April-June was only slightly higher than last year; it was balanced by a slightly higher export surplus on services. The Reserve Bank's policy of holding the real effective exchange rate more or less constant has probably contributed. The current account deficit was slightly higher; it was more than made up by higher capital inflows. The world is still buying the shining India story; as long as it does, capital inflows will continue. They would swell even further if the ministry of commerce removed its niggling controls on foreign direct investment.

Thus, India continues to do surprisingly well in a generally deteriorating international climate. That is good for India, but bad for policy. For there is scope for radical reforms in agricultural policy and foreign investment policy; but they are unlikely as long as the economy does well. Our government abandons shibboleths and reforms policies only when it is in a crisis; unfortunately, there are no early signs of one.

(This story was published in Businessworld Issue Dated 28-11-2011)