Lower GDP growth figures for the fiscal year 2007-08 should come as an alert to the government and the Reserve Bank of India that the economy could be witnessing a downturn in the business cycle. For this year the Indian economy is estimated to have grown at 8.7 per cent, down from 9.6 per cent in the previous year. This was largely due to lower industrial growth — which fell from 11 per cent in the previous year to 8.9 per cent in 2007-08. This was not accidental. The RBI was tightening monetary policy all through the year, and achieved slowing down the industrial sector. While investment demand remained high and grew at 15.7 per cent, consumption slowed down to 6.8 per cent. Looking forward, this year too there is likely to be slower GDP growth. Considering that monetary policy has not been eased, that the world economy is likely to slow down with the US economy already showing signs of a slowdown — if not an outright slide into recession — it will be very likely that Indian exports and industry will slow down. There is an expectation that investment growth will not slow down because it is based on infrastructure investment. But given the difficulties of infrastructure, this should not be taken for granted. Moreover, investment is highly cyclical and can change suddenly if expectations change. This has happened on the upside for the last four years, with the investment to GDP ratio rising sharply. It can also happen the other way round. The government should not sit and do nothing watching a slowdown come. Both fiscal and monetary policy should be geared to be counter-cyclical. India will need expansionary policies if we are on the downturn of a growth cycle. For all the talk of decoupling, we are too integrated with the world today to think that the world can slow down and we will remain insulated. Therefore, interest rates should be lowered. The cash reserve ratio should be cut to increase bank lending. There should be tax cuts to push industrial growth. The RBI failed to act. But then it is not accountable to Parliament. With the Union budget round the corner, the finance minister should act, and act decisively.
