Industrial deceleration remained a key challenge for India’s policy makers battling to engineer a quick turnaround of Asia’s third-largest economy that grew 5.3% during the July-September quarter compared to 5.7% in the previous quarter.
The manufacturing sector crawled at 0.1% during the period, latest national income data released on Friday showed, prompting business leaders to urge the Reserve Bank of India (RBI) to cut borrowing costs to aid a much-needed industrial turnaround.
“An important element of the cost structure for manufacturing is interest rates and given the current inflation situation the RBI should ease the monetary policy stance as this would give a boost to investment sentiment”, Sidharth Birla, president, Ficci, an industry body, said in a statement.
With inflation reaching multi-year lows, all eyes are on the RBI for a possible announcement on an interest rate in its monetary policy on December 2.
India’s retail inflation fell to a three-year low of 5.52% in October, while wholesale inflation rate plunged to five-year low of 1.77%, aided by a sharp drop in vegetable and petrol prices.
Lower inflation, in turn, could prompt the RBI to cut interest rates and nudge banks to lower home loan easy monthly installments (EMIs).
The government wants to boost the share of manufacturing in the country’s gross domestic product to 25% from about 15% at present, roughly the same share of the economy as peers like Brazil and Russia, but less than China’s 32%.
“In view of slower growth of IIP (Index of Industrial Production) in the second quarter vis-à-vis the first quarter and in particular the manufacturing component; a lower growth in industry sector vis-à-vis the first quarter is not surprising,” the finance ministry said in a statement.
Over the last six months the government has laid out the red-carpet for foreign investors with a string of initiatives such as ‘Make in India’, which is aimed at turning India into a manufacturing powerhouse, and iron out procedural and bureaucratic irritants that are often cited as holding back investments.
Analysts said the pace of India’s recovery will largely be determined by the rapidity at which the government is able to push through key reforms including contentious ones such as the raising the foreign direct investment (FDI) cap in the insurance sector to 49% from current 26%, easing land buying rules for industry and modernising India’s labour laws.