The tender green shoots of a turnaround in industrial production are encouraging, but it might be foolish to think that the economy will grow stronger from now on without the government tackling the key issue impeding manufacturing, particularly in capital goods, which is the true indicator of a strong revival. Coal and gas shortages are continuing, which the government is yet to tackle. Several studies have shown that the power sector’s 11th Plan targets haven’t been met, and the gap between target and achievement will be bigger in the 12th Plan due to shortages. On the positive side, though, India is one of the frontrunners in renewable energy generation, which if accelerated could cut this country’s dependence on expensive oil imports.
A lot of hope is being placed on interest rates being cut soon, given the strong belief that low interest rates will solve industry’s problems. Union finance minister P. Chidambaram has also expressed hope that interest rates will be cut when the Reserve Bank of India announces its credit policy on October 30. There is no doubt that Indian interest rates are high, at 11 to 12 per cent, given that it is 4-5 per cent or even less globally, particularly in countries with which India competes on the export front. China, for instance, not only has low interest rates but its government supports exports to the tune of 17 per cent directly, and another six per cent indirectly. It might be a good idea for the government to thrash out this issue with exporters sector by sector, so that India’s exports get a much-needed boost. For instance, can’t it reduce the enormous paperwork in various sectors, from exports to building construction?
The current account deficit — where import expenditure far exceeds export earnings — is high, and must be brought down. It will also help to mitigate the negative effects of a volatile rupee. Small and medium industries, the economy’s backbone, exporters are the major victims of a volatile rupee as it completely wrecks their financial planning.
Lowering interest rates is one of the issues that has to be resolved. But if investments are to be made by domestic as well as foreign companies, much more has to be done. Merely cutting diesel subsidies, where the potential is very limited, or capping the number of LPG cylinders for households is not going to bring down the fiscal deficit, and global investors remain wary about the government’s ability to control it. What the government has to do is act expeditiously on several fronts, including the decision-making process, as the global situation continues to
be plagued by slow growth and there are no signs of any early resolution of these problems.