Most forecasts for economic growth in the financial year 2009-10 seem to be converging between 6 per cent and 6.5 per cent. That’s par for the course given the global economic climate. The important question though is whether the

recovery that has been achieved is vibrant and sustainable. And the answer is that though there has been impressive recovery, it does not appear as strong as those urging contractionary policies would have it. The latest figures for industrial production (for August) show a robust double-digit growth rate. But these figures, calculated on a

year-on-year basis, are somewhat inflated by taking a low base — industrial growth in the same month last year was just below 2 per cent. Also, if the figures are adjusted for seasonal variation, and month-on-month rates are looked at, industrial growth is relatively modest. And it isn’t simply about the current growth rate either — to make it to 6.5 per cent for the year, this revival, in no small part driven by fiscal and monetary stimulus, needs to be sustained.

In the short term, therefore, a lot depends on the monetary policy stance adopted by the Reserve Bank of India. The government is already committed to maintaining the fiscal stimulus. Hopefully, the RBI isn’t any less convinced about the need to continue with soft interest rates. If the concern is about rising inflation, food prices won’t move because of monetary policy, short of effecting a massive demand crunch. By raising rates, we may return to the perverse situation — simultaneous stagnating growth and high food inflation — that we briefly witnessed in the summer of 2008, when the RBI raised rates in response to commodity price inflation.

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