Montek Singh Ahluwalia and (right) Pranab Mukherjee

Jan. 12: As policymakers gear up for their biggest battle against inflation, there are worrying signs that India's boom-boom growth story — the biggest lure for foreign investors — may be starting to sputter.

On Wednesday, the first warning signal went up with the government’s statistical office announcing that the index of industrial production (IIP) — the broadest measure of plant and factory performance — had grown by a piffling 2.7 per cent in November against a polled estimate of 6.29 per cent.

The index stood at 317.9 — its lowest level since the financial year began on April 1.

The government has been confident that the economy will grow by 8.5 per cent this fiscal, which ends in March 2011. It continues to insist that the November setback is just a blip, pointing to the April-November growth of 9.5 per cent against 7.4 per cent in the corresponding period last year.

“The longer term growth story is still intact,” said Planning Commission deputy chairman Montek Singh Ahluwalia.

Finance minister Pranab Mukherjee blamed it on a high base effect — a statistical skew that arose because of strong growth in November 2009. Others attributed it to a post-festive season lull in November. Strangely, the lull wasn’t visible last year.

“We shall have to look into (the reasons) and take corrective measures so that IIP numbers revive in the remaining four months,” Mukherjee said.

The November wobble will present policymakers with a dilemma: should they tamp down hard on inflation currently running at 7.4 per cent and run the risk of scuppering the growth story? On the flip side, is inflation a necessary evil of the growth story — and must we learn to live with it?

Food inflation has already surged to 18.3 per cent, sparking howls of protest from homemakers to politicians. The government has already flagged inflation as its biggest foe: it is committed to bringing overall inflation down to 6.5 per cent by the end of March. If it fails, the Congress-led government will have to face the voters’ ire in crucial Assembly elections in May in Tamil Nadu, Bengal, Kerala, Assam and Pondicherry.

Later this month, monetary policy wonks at the Reserve Bank of India will hunker down to decide on inflation-busting measures that will include a much-anticipated quarter of a percentage point increase in benchmark interest rates.

It could also decide to soak up some of the roughly Rs 60 lakh crore that is swilling around in the financial system. Of this, just cash in the hands of the public has swelled 20.5 per cent to Rs 8,71,897 crore from Rs 7,23,616 a year ago.

A cash mop-up operation could, however, spell trouble for industry just when it plans to open throttle in the January to March quarter, which traditionally sees the best growth numbers during the year.

Banks have already started complaining about a severe cash crunch at a time when industry has been clamouring for more credit. Overall bank credit has swelled 23.8 per cent to 37,47,113.76 as on December 17 last year from Rs 30,25,999.24 crore a year ago.

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