The latest data on the Index of Industrial Production (IIP) shows a dismal scene. The growth in industrial production in the month of March of 2008 fell to a six-year low of 3 per cent against 14.8 per cent in the same month a year ago. As the slowdown in industrial production has gradually set in, the average growth in industrial production during the fiscal 2007-08 was at a three year low of 8.13 per cent against 11.6 per cent in 2006-07. Though there was across the board decline in sectors, the manufacturing sector, which accounts for 80 per  cent in IIP, was one of the worst performers. Specific industry sectors that witnessed significant dips include basic chemicals, metal products, textile and readymade garments, capital goods, consumer electronics, tractors and motorcycles.

The sudden slowdown in industrial production is also a good example of creating a new sickness to cure another disease. The Reserve Bank of India (RBI) hiked interest rates nine times in the last 40 months to control inflation. It also sponged off cash from the system by increasing the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) to reduce liquidity. The result was a slowing down of industrial production for the want of cash and demand. When all over the world interest rates have crashed, the RBI is sticking to its guns. For most firms in India borrowing costs anywhere between 12 and 16 per cent in interest as against 3 per cent in the US, 4 per cent in Europe and 2.5 per cent in Japan.  

What is more alarming is that the slowdown in industrial production is accompanied with a high rate of inflation leading to the fear of stagflation in the economy. The general increase in price is largely due to the rise in food and commodity prices. The spiralling international price of oil is another major cause of concern. If the momentum of industrial growth is to be maintained in the long term, the government will have to find ways and means to reduce interest rates and improve availability of funds, without pushing up prices. This can happen with improved output from the farm sector through better irrigation, easier credit delivery and better price realisation. The government should continue to finance large and labour-intensive projects to generate employment and income. Money spent will generate new income which in turn will lead to increase in demand.