Wake up, Mr PM! Our economy is running on empty

For most of this year, as the engines of the Indian economy misfired repeatedly, the wise mandarins of the Indian government were in snooze mode. Preoccupied for the most part with political survival, they took their eyes off the economic ball, allowing policy initiatives to drift. The governing philosophy appeared to be modelled on that of Charles Dickens’ fictional character Wilkins Micawber: that “something would turn up” and bail out the economy.

After yesterday’s shocking data, which showed industrial production to be in contractionary mode, a raging fire has been lit under the Manmohan Singh government. With industrial production contracting, and with inflation still untamed, everything about the economy screams ‘stagflation’, which represents the sum of all fears for economists. In every way, it is a rotten place to be.

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Singed by the heat, the government has finally bestirred itself, but even today, it appears to mistake activity for action, and has sought refuge in knee-jerk populism.

Woken up from its slumber, the Prime Minister’s Office is now eager to signal that Manmohan Singh is not, as is widely believed, missing in acti0n. On Monday, his office directed key ministries to send on a list of bills (relating to their respective ministries) that have been held up in parliament, including the parliamentary standing committees.

The government is also looking for ways to fire up the stalling economy, perhaps by providing incentives for investments in the infrastructure sector. There are indications that Manmohan Singh will call an inter-ministerial meeting tomorrow to discuss long-pending reforms in the infrastructure space.

Simultaneously, commerce and industry minister Anand Sharma has convened a meeting with industry leaders, who have long complained that policy paralysis has caused the economy to seize.

Yet, even in this moment of crisis, the government seems excessively preoccupied with the political survival of the Congress, particularly given that elections to crucial state assemblies are coming up. And its reflexive resort to the economics of populism - one of its first priorities appears to be get the Food Security Bill, with all its flaws, through Parliament - makes no acknowledgement of the contribution of ill-funded, improperly conceived welfare schemes to the widening of the fiscal deficit, which has fuelled inflation and is today cramping the government from stepping in with stimulus measures.

Most of the economic problems confronting the government today can be traced to the fact that for the whole of this year, while inflation hovered at or above the 10 percent mark, the government outsourced the job of fighting inflation entirely to the RBI without any initiatives from its side. In the absence of supply-side initiatives from the government - those stalled investments in infrastructure projects that it is now looking to revive- the RBI was constrained to overcompensate by hiking interest rates excessively.

These same efforts that the government is contemplating today would have provided the government some breathing room today if they had been taken up a year ago, when the early warning signs of a slowdown were blaring loud and clear to anyone who was not in deep sleep.

The risk lingers that the policy mandarins may continue to deploy monetarist tools in the short term by requiring the RBI to lower interest rates even if the RBI isn’t convinced that the battle against inflation has been well and truly won. The risk of policy errors feeding the very real fears of stagflation remains high.