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Industrial output dips, inflation on edge

business Updated: Mar 13, 2009 02:10 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times
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India’s industrial output contracted for the second consecutive month, falling by 0.5 per cent in January, while inflation fell to a six-year low of 2.43 per cent, presenting policymakers with a difficult problem to spur growth in a recession-hit world.

The fall in the factory output measured by the index of industrial production was along expected lines, with exports falling by about 16 per cent in January as demand for goods in the world’s largest markets (the US, the EU) shrank sharply.

The economic slowdown in the world has also partially contributed to a sharp drop in prices worldwide, particularly of crude oil and other commodities. Crude oil prices have fallen from $147 a barrel in July last year to about $45 a barrel, as demand for oil plummeted after the world’s biggest economies slipped into recession.

The fall in inflation is also due to a statistical phenomenon called the “base effect”, where a small movement registers as a sharp fall due the high value of the previous year’s figure with which the comparison is made.

“The fall in inflation is along expected lines,” said chief statistician of India Pronab Sen. “It was during last February and March that inflation spiked. The prices of commodities, primarily oil and foodgrain, have moderated.”

On current trends, the wholesale prices-based inflation could enter a negative zone in the next six to eight weeks.
The three fiscal stimulus packages, complete with tax cuts and more than budgeted expenditure, would limit the government’s policy options.

Under normal circumstances, low inflation indicates low demand for goods and services. This could result in lower investment by firms as they defer growth plans.

“As the election code of conduct is now in place, the government cannot announce any policy measures,” said Yashika Singh of consulting firm Dun and Bradstreet. “We therefore expect industrial growth to remain subdued till the April-June quarter.”

Analysts did not rule a further cut in interest rates in the coming months.

According to the Reserve Bank of India (RBI), the impact of the global downturn on India “has turned out to be deeper and wider than anticipated earlier”.

The RBI had recently cut the repo rate — the rate at which banks borrow from it — signalling a further reduction in final borrowing rates. “We expect another 1 percentage point cut in rates by mid-2009,” said Sonal Varma of Nomura Financial Advisory and Securities.