C. Rangarajan is Prime Minister Manmohan Singh’s ears and eyes as far as economic policy-making is concerned. As chairman of the PM’s Economic Advisory Council, Rangarajan brings to the table a host of skills, including a great understanding of monetary economics. He tells BW’s P. Vaidyanathan Iyer that businessmen tend to overemphasise the impact of interest rates and feels India must wait and watch before changing its policy stance on rates. Although he is certain industry will grow slower this fiscal than the past couple of years, he does not believe there will be any steep decline.

The industrial output in July and August show a slowing down. It is at an 18-month low if you leave out the index numbers in October 2006. Are you worried?
The behaviour of the index of industrial production in any one particular month should not be viewed as a signal of what is going to happen in the rest of the year. I have looked at the past. Even in the recent period, when the index had fallen very sharply in one month, it picked up subsequently. For example, in October 2006, the growth rate fell to 4.6 per cent. But subsequently, as we know, the industrial growth was strong. So, we should not, in some sense, draw too strong a lesson from the numbers in one month.

Nevertheless, one sees a sharp decline in consumer durables in July. Actually, the growth rate was negative (-3.2 per cent) compared with the very strong growth in the previous year. This may be partly due to the tightening of credit. But there are some other sectors in the economy that are growing strongly. For example, cement is growing at 9 per cent, steel at 7 per cent, and basic chemicals at 11.8 per cent. Therefore, I would surmise that the growth rate for industrial production would be strong in the current year. Certainly, it will be slower than what it was in the previous year, but there is nothing to show that the production will drop very steeply this year.

There is a reduction in the growth in sales of consumer durables, commercial vehicles and two-wheelers. These make the slowdown signals appear more real…
Some changes are policy induced, for example, moderation in the mortgage market. Housing loans may be coming down, not just because of interest rates, but also because land prices have gone up. We had earlier talked about overheating in some sectors, so some moderation is warranted. What is happening in transport vehicles is important. But I am not convinced there is an underlying trend of decline. We have the festival season. There could be a pick-up in many of these areas.

Consumption has slowed down in the past few months. How convinced are you that a pick-up in investments will help in sustaining the growth momentum?
A consumption boom, if it lasts long enough, leads to a boom in investment. After all, the acceleration principle in economics tells us that investment is triggered and sustained by an increase in consumption. But investment plans are based on long-term trends. There is strong investment-driven growth in the economy and my own surmise is that this will continue. In the case of many sectors such as cement, there is a strong investment boom going on that is predicated on a fairly large increase in consumption. Certainly, it is true that a steep decline in consumption demand over a period of time will affect the investment sentiment. But there is no reason to believe at this point in time that the decline in consumption demand will persist.