Persistent Hikes in key policy rates have failed to slay the monster of inflation. Instead, it has inflicted collateral damage: slowdown in India’s manufacturing growth. B&E was the first to identify that India was slipping into a definite slowdown (cover story; August 4, 2011). What can policymakers do to bring down prices without hurting growth?
It is the season of bad news. News of scams and scandals, protests and labour strikes, a wobbling Sensex, soaring food prices and policy paralysis in the government have been hitting the headlines with metronomic frequency. The depressing state of affairs in the global economy and the spreading debt crisis in Europe are an added aggravation. In the past, India weathered the global financial crisis with aplomb thanks to the timely intervention from the Centre, which understood the gravity of the situation and promptly reacted by releasing three stimulus packages in quick succession amounting to Rs.1.86 trillion during 2008-09. But after a brief sunshine, the storm clouds are back on the horizon.
The worst piece of news to have hit the Indian economy in recent days is that the country’s factory output has slowed to its lowest pace in the past 30 months. According to figures released in September this year, the manufacturing PMI, or Purchasing Managers’ Index, for India, slid more than two points to 50.4. This a shade above the 50 mark, which separates contraction of manufacturing activity from expansion.The September survey finding – based on data from more than 500 manufacturing firms – was the lowest since March 2009, when the Index had slipped below 50 owing to the global slowdown.
That India was inching towards economic slowdown was first indicated by numbers thrown by the Index of Industrial Production in July. The IIP figures showed factory output growth dipping to a 21-month low at 3.3% in July 2011 as compared to 9.9% in the corresponding period a year ago. To add to the cup of misery, the Wholesale Price Index based inflation stood at 9.22% in July, much above the 5.5% mark, which the RBI thinks to be the comfort zone. Such persistently high inflation above 9% has not been witnessed anywhere else in South Asia/South East Asia or even Latin America in recent times.
Both the PMI Survey and IIP raise certain questions and fears about the future course and direction of the Indian economy. As a result, fresh doubts are being voiced about the ability of the economy to sustain its present growth momentum. HSBC chief economist for India & Asean Leif Eskesen thinks that Indian manufacturing growth is clearly slowing in response to the tighter monetary policy, uncertainty created by high inflation and weak global economic environment. Economists of different hues concur that as the effects of a dozen interest rate hikes by the RBI over the past 18 months continue to reverberate across the economy and so long as global economic conditions don’t improve, growth in India’s manufacturing sector will remain subdued in the foreseeable future.
It is the season of bad news. News of scams and scandals, protests and labour strikes, a wobbling Sensex, soaring food prices and policy paralysis in the government have been hitting the headlines with metronomic frequency. The depressing state of affairs in the global economy and the spreading debt crisis in Europe are an added aggravation. In the past, India weathered the global financial crisis with aplomb thanks to the timely intervention from the Centre, which understood the gravity of the situation and promptly reacted by releasing three stimulus packages in quick succession amounting to Rs.1.86 trillion during 2008-09. But after a brief sunshine, the storm clouds are back on the horizon.
The worst piece of news to have hit the Indian economy in recent days is that the country’s factory output has slowed to its lowest pace in the past 30 months. According to figures released in September this year, the manufacturing PMI, or Purchasing Managers’ Index, for India, slid more than two points to 50.4. This a shade above the 50 mark, which separates contraction of manufacturing activity from expansion.The September survey finding – based on data from more than 500 manufacturing firms – was the lowest since March 2009, when the Index had slipped below 50 owing to the global slowdown.
That India was inching towards economic slowdown was first indicated by numbers thrown by the Index of Industrial Production in July. The IIP figures showed factory output growth dipping to a 21-month low at 3.3% in July 2011 as compared to 9.9% in the corresponding period a year ago. To add to the cup of misery, the Wholesale Price Index based inflation stood at 9.22% in July, much above the 5.5% mark, which the RBI thinks to be the comfort zone. Such persistently high inflation above 9% has not been witnessed anywhere else in South Asia/South East Asia or even Latin America in recent times.
Both the PMI Survey and IIP raise certain questions and fears about the future course and direction of the Indian economy. As a result, fresh doubts are being voiced about the ability of the economy to sustain its present growth momentum. HSBC chief economist for India & Asean Leif Eskesen thinks that Indian manufacturing growth is clearly slowing in response to the tighter monetary policy, uncertainty created by high inflation and weak global economic environment. Economists of different hues concur that as the effects of a dozen interest rate hikes by the RBI over the past 18 months continue to reverberate across the economy and so long as global economic conditions don’t improve, growth in India’s manufacturing sector will remain subdued in the foreseeable future.
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