Decisive slowdown, IIP grows just 3.3%

Continuous hikes in key policy rates since mid-March 2010 have begun to decisively slow down the Indian economy. The index of industrial production (IIP) or factory output skid to its lowest in the last 21 months to grow a meagre 3.3 per cent in July compared with a robust 9.9 per cent in July 2010. What is worrying policy makers more is the sharp 15.2 per cent deceleration in capital goods compared with a whopping 40 per cent growth last July, suggesting that corporate investment have hit a wall.

"The IIP figures are very disappointing. This indicates that the monetary tightening of the Reserve Bank of India has started biting," R Gopalan, secretary, department of economic affairs, ministry of finance, said in the sidelines of an infrastructure seminar in New Delhi. The RBI has hiked the repo rate (the rate at which it lends to banks) 11 times in the last 17 months by 475 basis points.

The poor show is expected to weigh heavily on the RBI when its board meets on September 16 to review the monetary policy. While most analysts expect the monetary authority to increase the repo rate by another 25 basis points given that inflation continues to hover around double-digit levels, India Inc hopes the RBI to reverse its stance. At least, the RBI can effect a pause, said a finance ministry officials who did not wish to be quoted.

Clearly, the RBI is caught in a bind. Chief Economic Advisor in the Finance Ministry Kaushik Basu attempted to explain the central banker's dilemma. "We are balancing between two very difficult problems. One is inflation which is persistent at close to 10 per cent and slowdown in growth ... the RBI will have to balance it out and take a decision," he said. In fact, C Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, said there may be a need to revisit the growth target for the industrial sector for the current fiscal given the moderation witnessed in July.

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