Are we Headed for Slowdown
However, in March and April 2008, these numbers came down to 3.9% and 7%, respectively. Any additional squeeze on the interest rate at this juncture will further stunt industrial growth. Unfortunately, as a ripple effect of a slowdown in the manufacturing sector, even the services sector is now showing signs of a growth fatigue.
Yet, there is a silver lining. Going by Ficci’s latest surveys on industry’s perception, we may well have reached the bottom of the curve and could soon start on the path of recovery.
Ficci feels that policymakers should now take a fresh look at the measures taken till date. It is clear that inflation has proved to be interest insensitive. The current inflationary pressures stem from supply side rigidities in primary goods and manufactured products.
The remedy obviously lies in stimulating investments, incentivising capacity addition and nudging productivity increases. And these can come only through innovative policy packages. Industrial growth must be encouraged by a further burst of reforms and not by raising the interest rates.
Today, there are severe limits for Indian industry for obtaining funds from different sources. This is particularly true in the case of medium-sized companies. The equity market is down and as a result IPOs have dried up. The corporate debt market is seeing limited activity.
Although the ECB regulations have been eased recently, these continue to remain quite restrictive. In such a situation, bank financing becomes the key source of funds for the corporates.
However, it is now feared that with both CRR and repo rate being hiked simultaneously, even the bank financing route may become elusive. And, if this happens, expansion plans would be put on hold. This scenario must be avoided at a time when we could be on the verge of a resurgence. Let us revisit the anti-inflationary package from a supply side perspective.
Perceptions about India’s near term growth prospects have dramatically shifted from euphoria to cautious optimism to now-approaching pessimism, all in just one quarter! While few will debate about structural strengths of Indian economy, the acceleration in monetary tightening in June in the wake of grim inflation scenario has raised questions about the economy being able to maintain the growth momentum.
The stance of the annual monetary & credit policy statement in April ’08 was to maintain price and financial stability. Importantly, it also emphasised on maintaining a conducive environment for growth.
With inflation printing double digits for the week ending June 7, the RBI clearly indicated an emphatic shift in its stance towards inflation management against the backdrop of robust growth in non-oil imports, domestic bank credit and direct tax collections which suggested that growth has hitherto remained relatively undisturbed.
With domestic supply constraints unlikely to ease soon and crude oil prices ominously close to $150 per barrel, the onus has clearly shifted to demand management. Indeed, the recent hike in CRR and repo rate by 50 bps each, is a tough dose to address inflation through demand management.
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