India’s factory output grew by a faster-than-expected 7.3% in March, but analysts said on Thursday that industrial activity will be hit in the coming months as rising input costs and costlier borrowing squeeze corporate profitability, forcing them to defer investments.
Both the government and Reserve Bank of India (RBI) have acknowledged that underlying inflationary pressures have accentuated, even as risks to growth are emerging.The RBI, in its annual policy review, pegged the real GDP (gross domestic product) growth rate for 2011-12 at 8% — down from the estimated 8.6% in 2010-11. This is almost 1 percentage points lower than the government estimate of 9%.
Finance minister Pranab Mukherjee has said that energy prices and a normal monsoon will be critical for the economy to expand at 9%.
“In Europe there has been deterioration. We are worried about Greece and oil price, which, despite softening over the last week, has been very high. In this scenario it is likely we are going to downgrade growth projection a little bit,” chief economic adviser Kaushik Basu said.
The RBI has raised repo rates by nine times in the last 13 months to cool prices. A higher repo would raise banks’ borrowing costs and prompt them to increase interest rate on final home, auto and corporate loans.
“Growth in the manufacturing sector is going to slow down in the coming months because commercial banks have raised interest rates which will affect investments,” said Rajiv Kumar, director-general, FICCI.
“The RBI’s tightening will soften growth but have a less effect on slowing inflation owing to the impact of high global commodity prices,” said Rajeev Malik, senior economist, CLSA Singapore.