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A Disappointing Show

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Reflecting slowdown, industrial production slipped to a "disappointing" two-year low of 1.9 per cent in September, a development that could prompt RBI to halt rate hikes in its policy review next month. Prime Minister's Economic Advisory Committee chief C Rangarajan said industry may grow by just 6 per cent in the current fiscal while Chief Economic Adviser Kaushik Basu wanted the Reserve Bank if India (RBI) to have a "rethink" on its policy of monetary tightening.

However, Planning Commission Deputy Chairman Montek Singh Ahluwalia struck a different note saying there is no connection between a high interest rate regime and a decline in industrial growth.

A slowing economy has been squeezing government finances and analysts are questioning the government's ability to restrict the fiscal gap for the financial year ending in March 2012 at the budgeted level of 4.6 per cent of gross domestic product (GDP).

Slowing tax revenues, along with stalled share sales in state-run firms hurt by depressed market conditions, have added to the government's woes.

Many economists see the deficit for the year overshooting the 5 per cent mark. The RBI has warned of inflationary risks if the government's deficit for 2011-12 exceeds the budget target.

As headwinds to global growth gain pace, several central banks around the world have begun to cut interest rates to shield their economies.

Export growth slowed down in October widening the trade deficit to a four-year high. The trade ministry sees the trade deficit for the full year in excess of $150 billion, but expects a slowdown in imports in the last few months of the current fiscal year.

This in turn may widen the current account deficit for the year to 3 per cent of GDP from 2.6 per cent last year.

The partially convertible rupee has been the worst performing currency in Asia so far this year, having shed more than 9 percent against the dollar.

Car sales also dropped 24 per cent last month, their sharpest decline in more than a decade, as consumer demand sagged amid high borrowing costs while inflation remained persistently high near double-digits despite the long and aggressive monetary tightening.

Advisors Alarmed
Prime Minister's economic advisory panel chief C Rangarajan described the dip in factory output in September as "disappointing" and said industry may grow by just 6 per cent in the current fiscal, as against the earlier projection of 7 per cent.

"IIP for September is bad, but I do see a pick-up by the end of March. We had originally expected overall IIP at 7 per cent for the fiscal, but now it could be 6 per cent," Rangarajan, the chairman of the Prime Minister's Economic Advisory Council (PMEAC), told PTI on Friday.

Chief Economic Adviser Kaushik Basu wanted the Reserve Bank if India (RBI) to have a "rethink" on its policy of monetary tightening.

"The conventional policy of interest rates... now you do have to rethink on that," Basu said while referring to the increase in policy rates by the central bank.

RBI has hiked key policy rates 13 times since March 2010 to tame rising prices.

Ahluwalia Sings Different Tune
Even as India Inc blamed the high interest rate regime for decline in industrial output growth, Planning Commission Deputy Chairman Montek Singh Ahluwalia said there is no connection between the two.

"I would not draw any connection between the rate hike and decline in industrial production. The rate today is roughly what it was when the economy was growing at 9 per cent," Ahluwalia said when asked if RBI's tight monetary policy was hampering industrial production.

"I do not think the slowing down (of industrial production growth) should be attributed to only the short-term interest rates," he said.

The Index of Industrial Production (IIP), according to the data released on Friday, declined for the third consecutive month to 1.9 per cent in September, down from 6.1 per cent in the corresponding month last year.

During the April-September period this fiscal, IIP growth stood at 5 per cent--against 8.2 per cent in the same period last year-- which was described as "sluggish" by RBI Deputy Governor Subir Gokarn..

The decline has been mainly due to poor performance of mining and manufacturing sectors which account for over three- fourth of the index.

India Inc, which has been demanding lowering of interest rates by RBI, said that central bank should reverse the trend of raising interest rates now.

Apex industry body CII blamed the high interest rate regime for slowdown in IIP.

"This probably reflects the impact of RBI?s interest rate hikes together with the continuous rise in inflation. With the global economic scenario also deteriorating, the RBI should not only pause but begin to reverse its interest rate hikes," CII Director General Chandrajit Banerjee said.

Further Evidence Of A Slowdown
Production of consumer non-durables fell an annual 1.3 per cent. While capital goods growth -- a barometer of investment in the economy -- contracted 7 percent, reflecting a stalling of major projects amid regulatory uncertainties and a policy paralysis that has held up major economic reforms.

Several banks have stopped lending to state power distributors as well as to property developers and road projects on worries over asset quality.

Moody's Investor Service on Wednesday downgraded its outlook for India's banking system to "negative" from "stable", as it warned of slowing growth at home and overseas hitting asset quality, capitalisation and profitability.

Weak global demand is exacerbating the slowdown in an economy whose growth this year might be well below the 8.5 per cent heady pace in the fiscal year that ended in March.

The BSE Sensex extended losses to more than 1 per cent following the data. India's new 10-year 8.79 percent, 2021 bond reacted little after the factory data, but rose as much as 5 basis points to 9 percent later on worries of fiscal slippage.

The benchmark five-year swap rate and the one year swap rates were also unmoved post the data.

(With agencies)




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