The industrial output figure grew by 3.3% in July, the slowest in 21 months, presenting India’s policy-makers with a dilemma, as the string of measures to cool prices failed to tame inflation but eroded growth in the broader economy.
The Bombay Stock Exchange’s benchmark index, the Sensex, plunged to a two-week low of 16,501.7 points — down 365 points, or 2.2 % — on concerns over the weak industrial output growth and worries over the compounding debt problems in European economies such as Greece.Output in the capital goods sector was the worst hit-contracting by 15.2% — a sign that costlier borrowing and raw material costs are prompting companies to defer expansion.
The slower growth could result in fewer job openings and lower salary hikes as corporations hold back investment.
The government admitted that numbers were a reflection of a slowdown. “It (IIP numbers are) very disappointing... It is a sign of slowdown,” chief economic adviser Kaushik Basu said.
The latest data will add another headache to the Reserve Bank of India (RBI) which will present the mid-quarter review of the monetary policy on Friday.
Inflation continues to remain high — it was 9.22% in July — and economists expect the Centre to raise the rates further. “RBI’s main focus will remain on checking inflation, which continues to be uncomfortably high, hardly a situation for the RBI to switch off just yet,” said Rajeev Malik, senior economist at broking and research firm CLSA, Singapore.