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Industrial growth likely to drop

The country’s inflation rate based on wholesale prices, the widely used benchmark to track price levels, is expected to decline, writes N Madhavan.

business Updated: Jun 05, 2007 09:29 IST
Narayanan Madhavan

The country’s inflation rate based on wholesale prices, the widely used benchmark to track price levels, is expected to decline even further after hovering around Reserve Bank of India’s (RBI) targeted level of 5 per cent for the next three months. But industrial growth will also slow down, says the renowned government funded think-tank the Institute of Economic Growth (IEG).

The institute’s monthly report on the economy for May says industrial growth, which was 12.9 per cent in March over the same month a year ago, powered by manufacturing, capital and consumer non-durable industries, could have been aided by high expectations in industry, but will come down in the coming months.

The IEG has forecast an average growth of 9 per cent in industrial growth over the next three months. It says the increased interest rates, a decline in exports and a slow-down in consumer durables and construction activity would constrain industrial growth.

It says it expects a deceleration in money supply following a drop in demand for credit by the commercial sector. It expects prime lending rates and the foreign exchange rate to be stable over the next quarter.

The inflation rate fell to 5.09 per cent in the week ended May 19 from 6.09 per cent a month earlier.

IEG says retail prices for consumers will soften from the current levels.

“The moderation in our view is mainly due to the recent monetary policy stance that controlled demand-side inflation,” the institute's report says. “But the rise in the prices of food and primary articles show that there are still supply side constraints."

The report says inflation will decline further in coming months as the full impact of a squeeze on money supply takes some time to be revealed, while the forthcoming monsoon rains will influence commodity prices. Rising global oil prices are also a matter of concern, says the IEG report.