THE combined effects of a tightfisted central bank and a spendthrift government are showing up spectacularly in the first quarter of the current fiscal year. The economy grew a miserable 5.5 per cent in April-June 2012, down from eight per cent in the same period a year ago. … Industry, apart from power, has stopped growing. ... The shocker in the latest data set is that the growth rate in the biggest chunk of services — trade, hotels, transport and communications — is less than a third of what it was a year ago. Contradictory policies have destroyed an awesome amount of demand in the economy over the space of 12 months. More destruction is in store unless the contradiction is resolved.

The Reserve Bank of India was correct in its assessment that persistent inflation called for tighter interest rates. The unsaid second leg of such policy intervention was spending curbs by the government, which never happened. …The situation — where current economic momentum as well as future growth prospects are being jeopardised by the ruling coalition’s welfare commitments — can be salvaged by either fiscal rectitude or monetary easing. Expecting an election-bound government to see the light is a triumph of hope over reality.

It would be far easier to mount pressure on the central bank to ease up on interest rates to revive growth. That would be a costly mistake. India is not out of the woods so far as inflation is concerned. … — (Aug 31)