The story of resilience in domestic consumption can be cross-checked by looking at the performance of certain industries. Interestingly, the three industries which are showing signs of a comeback — steel, cement and auto — all cater mainly to the domestic market. More importantly, their recovery fits in with the story on resilient rural and semi-urban demand. Steel and cement are catering to the growing construction activities in those areas, which are also witnessing an increased demand for consumer products like vehicles. The one other sector which has, in fact, recorded an impressive performance through the slowdown is telecom. Again, the relatively cheap products and services provided by telecom companies are receiving an overwhelming demand response. Firms have seen a record rise in subscriptions in recent months, something which is reflected in their healthy balance sheets.

The challenge for policy now is to carefully nurture the green shoots. Unfortunately, the main policy obstacle to the flowering of the shoots is the high interest rate regime. Prime lending rates at which only the choicest investors and consumers can borrow are still in double digits. When you combine that with a rate of inflation that is near zero, you have an exceedingly high real rate of interest — a rate higher than the real rate in the period of boom. That is bound to have a perverse effect on economic prospects. Even the highly desirable, stimulus inducing infrastructure projects (which can boost investment and consumption at the same time) are only viable when cost of borrowing is between 8 per cent and 9 per cent.

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