The finance minister has not paid enough attention to the problem of declining consumer demand. If RBI governor Y V Reddy doesn't reduce interest rates soon, by the time the next budget comes around we will be in a full-blown industrial recession. By Prem Shankar Jha

Most commentators have given Mr. P. Chidambaram a 6 out of 10 score for his fifth budget. They have praised him for not rocking the boat by making significant changes in the tax regime at a time when the economy is doing well but slowing down. They have welcomed the few changes intended to give a boost to consumption. And they have criticised but forgiven his highly populist waiver of Rs.60,000 crore of debt incurred by farmers.

But reactions outside the television studios have been far more mixed. By the time he finished presenting the budget the BSE Sensex had fallen by 476 points, and NDTV's budget barometer showed that only 42 per cent of respondents, presumably drawn from the aam janata, considered it a good budget.

One does not have to look far to see why people feel disappointed. In a succession of pre-budget interviews senior leaders of Indian industry had hoped for measures that would revive consumer demand, bring down the interest rate, and do whatever was needed to stop the flood of Chinese consumer goods that has been flowing into India ever since the 15 per cent appreciation of the rupee against the dollar. The common anxiety that fuelled these demands was the slowdown in demand for their products.

Chidambaram acknowledged the slowing down of growth of consumer demand, and even made token reductions in excise duties to cushion the decline, but in the end it was apparent that he was making light of industry's fears. Yes there had been a decline in consumer demand, he said, but look at the capital goods industry. It has recorded 21 per cent growth. This shows that "Indians have strong faith in the future of the economy," he said.

He could not be more wrong. While he and his advisers rely on data collected by the Central Statistical Office the data that the captains of industry are looking at comes from their order books, which in effect tell them what will happen in the next three to six months. And what they are seeing must be distinctly worrying.

As anyone familiar with the working of trade cycles would know, we are only a few steps down the slippery slope of recession. The production of capital goods is high only because their gestation period is long. So the orders that are being fulfilled now were placed well before Reserve Bank Governor YV Reddy decided to raise interest rates sharply last January. The consumer goods industries have already been hard hit, and consumer durables have been hit the hardest of all. If the decline is not reversed, investment cannot fail to follow.

Mr. Chidambaram's failure to take the slowdown of consumer demand seriously is reflected by his token cut of 2 per cent in the general Cenvat. What industry needs is not this but a two per cent reduction in the interest rate. For the past six years the main driver of economic growth has been the growth in the demand for consumer durables and the boom in construction set off by the reduction in interest rates in 2002. The proposed Cenvat reduction will bring down the price of consumer goods by at most two to three per cent; last year's increase of more than two per cent in interest rates on consumer finance loans has pushed up the cost of buying a car, TV or refrigerator by 16 to 20 per cent!

On the face of it, Mr. Chidambaram's continuing preoccupation with inflation makes him out to be an economic cretin. He himself pointed out in his speech that each and every one of the potential causes of inflation today stems from supply constraints. So how did he and Mr Reddy expect monetary policy, which can only reduce demand, curb inflation except at enormous cost in terms of jobs and incomes?

But Mr. Chidambaram is far too experienced and intelligent not to understand this. So how do we explain his extraordinary reluctance to stimulate demand? The answer may lie in this government's quiet determination to have its cake and eat it too.

The government wants growth, but is still convinced that the Congress lost the 1996 election because of high inflation. So it wants price stability as well. That may be why it is letting Mr. Reddy have his way with interest rates, and is hoping to counteract the effect of high interest rates on growth by making small tax cuts. That hope is foredoomed.

If the RBI does not lower the cash reserve ratio and repo rates next month, by the time the next budget comes around we will be in a full-blown industrial recession.