Inflation and IIP number

Friday, November, 13, 2009: The IIP numbers coming down somewhat was something that was expected and I see it coming down further in the coming months, barring a few exceptions. The growth of capital goods is due to the liquidity that the government pumped in by way of pay commission and other stimulus measures. Sustained and stable industrial growth does not happen when the consumer level inflation is in the range of 15% or when you get peas at Rs 80 a kg. Car sale figures are not representative of industrial revival it merely shows that banks are desperate to lend and they consider lending against an asset called automobile to very safe, I think banks would do much good to India if they start lending to small enterprises on merits. It will solve many direct and indirect problems.
I disagree with economists who want to revise the numbers upwards in the coming months. The weakness of the dollar, the way Yuan is moving against the dollar, US unemployment figures etc point to a poor export growth scenario in the coming months. The numbers that we are seeing are due to the excess liquidity of the west that is pouring into India, the ground reality is that the feel good factor is due to this free money from the west, which can be called back anytime, it is their money not ours; we must keep this in mind. We have to be cautious and optimistic together. The growth that we are seeing is because of the feel good factor that is due to availability of easy capital. Fundamentals of economics point towards something quite different.

The base effect will start coming into play from Jan 2010 onwards and we must keep that in mind. I would like that RBI monitors the lending of the banks. Fundamental growth does not come by selling cars; in India it will come when the small enterprises flourish when agricultural production per unit land area increases. On the side of the government they will need to ensure that inflation is kept under check, else the social problems will surpass the economic issues and it would be something that cannot be tackled by either monetary or economic policy.