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As prices rise, fall in factory growth

business Updated: Jan 13, 2011 00:57 IST

Already battered by high inflation, the government knocked against a fresh problem on Wednesday — a possible industrial slowdown, barely a month before it presents the Union budget.

A widely watched factory output barometer, released Wednesday, showed industrial growth was 2.7% in November last year, its slowest pace in 18 months, and a sharp decline from 11.3% in the previous month.

Following Tuesday's meeting on prices called by Prime Minister Manmohan Singh, finance minister Pranab Mukherjee, agriculture minister Sharad Pawar, chief economic adviser Kaushik Basu and cabinet secretary KM Chandrasekhar brainstormed throughout Wednesday to firm up a strategy to fight rising prices.

Twin devils

2.7% Industrial growth in November 2010, an 8.6% drop from 11.3% in October
18.32% Food inflation rate for week ended December 25, 2010, caused by high cost of onions and other vegetables
Analysts and India Inc expect RBI to raise key interest rates to pull down inflation — a move that could have an adverse impact on industrial output

The government's response to inflation is being drafted by Basu and will be presented to the PM on Thursday, sources said. Freeing up imports of commodities to bolster supplies is emerging as the cornerstone of the government's short-term response to cooling prices. A plan to raise prices of subsidised foodgrains for those above the poverty line has also been shelved indefinitely.

"In the absolute short term, we have to rein in prices of food articles. Whatever needs to be done to source these commodities from inside or outside India will be done as soon as possible," a top economic manager of the government said.

This is a strong indication that the government could temporarily ease a slew of tariffs and duties it levies on several essential imported commodities. "The commerce and civil supplies ministries are working closely to organise this," the top official said.

The government's response to inflation will also include effective distribution of these commodities. "If they have to be moved to areas within India where there is scarcity, then it will be done on a war-footing," the official said.

Futures trading — which has often been cited as a reason for price rise — is also likely to be curbed in several commodities.

However, the economy's problems have compounded thus: industrial growth has slid, inflation is high and higher interests could make borrowing costlier. If the Reserve Bank does raise key lending rates, expected on January 25, then companies — the backbone of India's sizzling growth — could defer planned investments.

This could hurt both growth and jobs.