What ES has said has been the staple of newspaper articles for the last six months. Thus, "one of the most important (reasons for the slow down in industrial growth) is the decline in investment as shown by the decline in capital goods production and the fall in the value of imports of capital goods during 1997-98. Other factors constraining industrial expansion were the sharp decline in growth of exports since 1996-97 and the persistence of high real interest rates".

There can be no quarrel with the description preferred by ES. The trouble is the industrial deceleration is twoyears old. ES states: "Given the background of slowing industrial growth, the budget for 1997-98 cut personal and corporate income taxes across the board". But the Chidambaram budget did not work. Industrial growth slowed down from 7.1 per cent in 1996-97 to 4.2 per cent in 1997-98. Nor did the reductions in the bank rate and in the cash reserve ratio of banks (April 1997) make an impact. ES lists several liberalisations relating to industrial policy (the hike in investment limit for small industry from Rs 60 lakh/75 lakh to Rs 3 crore, for example) and foreign investment policy. These turned out to be damp squibs.

ES offers no categorical answers as to why fiscal policy, credit policy, industrial policy and foreign investment policy failed to reverse the tide. It makes two points, however. One, there has been investment in excess capacity (in cement and automobiles, for example). Though valid, this is tantamount to saying that nothing can be done until consumption demand (for automobiles) and investmentdemand (for cement) catches up with supply in a year or two or three. Two, the Reserve Bank's policy relaxations did reduce nominal interest rates. The implication is that there was little reduction in real interest rates. That is to say, slowing inflation have kept real interest rates high.

This last is the closest ES comes to identifying the cause of the impasse the industrial economy has got into. But it chooses to ignore the issue in its bid to laud the government's achievements on the price front. ES crows: "The average inflation for 1997-98 was 1.4 percentage point less than the average inflation of 1996-97". (On a point to point basis, inflation was 5 per cent in 1997-98 against 6.7 per cent in 1996-97).

More. According to ES, one, the annual rate of price increase for fuel and power decelerated from 16.9 per cent in 1996-97 to 9.4 per cent in 1997-98 and for primary articles from 7 per cent to 5.5 per cent and, two, the rate of growth of manufactured goods prices decelerated to 3.8 per cent(1997-98) from 4.9 per cent in the previous year. ES fails to notice that costs of manufactures rose more than prices charged to consumers.

The rate of growth of prices of manufactures was below the overall annual price rise, as measured by the all commodities wholesale price index, in both 1996-97 and 1997-98. This means that industry has faced an overall increase in costs which it has been unable to recover. Corporates have not been able to pass on the increased costs of fuel and power to consumers. Furthermore, the terms of trade moved in favour of primary articles and against manufactured goods in both years.

Also, the consumer price index for industrial workers rose in the first eleven months of 1997-98 by 8.8 per cent against 9.9 per cent in the corresponding period of the previous year. The rise in labour costs was thus more than the rise in prices of manufactures in both years. The short point is that industry has been hurt by the movement of relative prices in favour of agriculture (following theinflated foodgrain procurement prices).

Exports, especially where the labour component is critical (garments are an obvious example) have been hit by high labour (food) costs.

Over-investment in 1993-94 and 1994-95 may have expanded supply more than demand. The glut has also been accentuated by import liberalisation. But it is also true that the overall rate of inflation has been depressed by the slow rise in prices of manufactures. This has happened at a time of rising costs for industry. Hikes in administered prices of fuel and power as also of foodgrains have boosted industry's costs.

Liberalisation is all about getting prices right. But the mix of prices created by the appeasement of the farm lobby has created the wrong signals for investors in manufacturing. The Economic Survey completely ignores the issue and thus fails to identify a key deterrent to investment.