India’s industrial growth slowed to 7.6 per cent in December from 13.4 per cent in the same month a year earlier, dragged down by slower growth in capital goods.
The latest data from the Commerce and Industry reinforced fears that high interest rates and a rising rupee have begun to impact the broader economy.
India’s gross domestic product, the government said last week, is expected to grow 8.7 percent through this fiscal year ending in March, down from 9.6 percent last year. "We expect a continued soft landing trend for the rest of the financial year and into 2008/09," said Indranil Pan, chief economist at Kotak Mahindra Bank
While demand for consumer goods and their production were the first to be hit by the high cost of finance, now it seems to be taking a toll on capital goods as well.
Growth in production of capital goods slowed to 16.6 percent
Commerce and Industry Minister Kamal Nath said the government planned to have meeting with industry groupings to probe into the reasons behind the slowdown. “Is it a temporary aberration or is it being caused by some other factor. I don’t know … high interest rates could be one factor,” he said.
Several commercial banks announced marginal cuts in interest rates over the past couple of weeks and analysts expect more cuts to come in coming months. But these will take time to make an impact.
"The impact of a cut in lending rates by banks will be reflected in the output after six months,” N.R. Bhanumurthy at the Institute of Economic Growth. "The Reserve Bank should now lower rates."