Slowing growth

The requests made by the banking sector and the industry to the Reserve bank of India to desist from further hike of interest rates is a sign of the economic slowdown experienced in the last few months. A clear indication of the slowdown was the poor performance of the industry as seen from the index of industrial production (IIP) figures for May which were released last week. The growth of industrial output was 5.6 per cent against 8.5 per cent last year. The pace of growth was the lowest in the last nine months. The disaggregated data show a fall in growth in the two key sectors of manufacturing and mining. While manufacturing slowed down from 8.9 per cent to 5.6 per cent, mining saw a precipitous decline from 7.9 per cent to 1.4 per cent. Manufacturing sector contributes 75 per cent of the industrial output and therefore its slowdown is a matter of serious concern.

The fact that the declines are from a high base is poor consolation. Nor will the good rise in power production bring much cheer. Output in some sectors like textiles and machinery and equipment has actually declined. The major reasons for the poor industrial performance are low credit flow because of high interest rates and a policy paralysis seen in government functioning. High inflation rates have forced the RBI to clamp down on credit availability. The government has been unable to contain inflation, and the outlook, as seen in the latest wholesale price index (WPI) figures, is not rosy.

Infrastructure, a key area, has seen the lowest credit intake and this has negative implications for the future.

Sectors like agriculture and services may show satisfactory growth. But industrial activity will gain good momentum only if there are clear signals of decision-making and action on the part of the government. The delays in framing mining and land acquisition laws have adversely affected coal and gas sectors.The RBI may not be keen to soften its monetary stance in the present scenario. But the situation can change if effective steps are taken to bring down the level of inflation. The global situation is also not very promising, with Europe, which is the country’s biggest  trading partner, going through economic troubles. That might affect export demand. A confluence of unfavourable factors may lead to an overall slowdown of economic growth.