Monetary tightening, an appreciating rupee and a high base of the previous year pulled down industrial growth to 7.1 per cent in July this year from a high of 13.2 per cent in the previous year.
Economists and industry captains felt the spike was a manifestation of high cost of funds and said this could have adverse consequences on the overall economic growth rate.
The sluggish growth was reflected across all sectors after the quick estimates of Index of Industrial Production (IIP) released on Wednesday showed that the manufacturing sector grew by 7.2 per cent during the month, compared with a sizzling 14.3 per cent in July 2006.
Growth in mining and electricity also decelerated. While mining production grew at a slower rate of 4.9 per cent from 5.1 per cent last year, electricity generation grew by 7.5 per cent, as against 8.9 per cent last year.
Saumitra Chaudhuri, economic advisor and research coordinator ICRA and member of Prime Minister’s Economic Advisory Council, said the decline in the industrial growth rate was not surprising.
He said monetary tightening, intended to slow down demand, reflected largely in transportation and consumer durable sectors, auto and other consumer durable sectors, which have an interest rate bias. “The rising interest rate discouraged demand, which eventually affected production,” Chaudhuri said.
There appeared to be a major weakening of demand in consumer durables such as refrigerators and televisions, as the sector clocked negative growth of (-) 3.2 per cent against a growth of 16.1 per cent in July 2006.
The growth of consumer goods sector in July slowed down to 5.3 per cent from 16.8 per cent last year.
T Bhaumik, Chief Economist, Reliance Industries Limited, said the deceleration was a direct result of high cost of funds.
“The high cost of money and the strengthening rupee is making its impact. The prime lending rate (PLR) is ruling at a very high rate,” Bhaumik said. FICCI president Habil Khorakiwala echoed a similar opinion. “Higher interest rate, an appreciating rupee and a tighter monetary policy were impinging on growth impulses,” he said.
The adverse impact of strengthening rupee on exports was also partially responsible for the decline. “The government should consider improving the competitiveness of the Indian exports,” Khorakiwala added.
Bhaumik said that the government could do well to announce measures for arresting the eroding competitiveness and confidence of the exporting community.