Growth conundrum: high rates hit industry, but prices out of control | india | Hindustan Times
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Growth conundrum: high rates hit industry, but prices out of control

india Updated: Jul 10, 2011 23:03 IST
HT Correspondent
HT Correspondent
Hindustan Times
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The Reserve Bank of India's (RBI) next move on policy rates hinges largely on two sets of data that will be released this week - industrial output growth for May, and the consolidated monthly inflation for June. Policy-makers face a harsh dilemma, as a slew of fiscal and monetary measures to curb inflation have not yet tamed runaway prices, and have instead hurt economic growth.

Factory output growth figures for May will be released on Tuesday, and wholesale prices-based inflation data for June two days later.

The galloping inflation rate - it was 9.06% in May - is likely to breach 11% next month, when the data starts reflecting the recent fuel price hike.

The government last month raised diesel, kerosene prices and cooking gas prices by Rs 3 a litre, Rs 2 a litre and Rs 50 a cylinder. This will have a cascading effect on most expenses, ranging from transport to food.

The hike in diesel prices alone will add 0.30 percentage points to the overall inflation rate, besides knocking up prices of most goods. Fuel, power and lighting carry a weight of 14.91% in the wholesale price index (WPI), India's most followed inflation index.

The central bank, which will present its quarterly monetary policy review on July 26, has raised the repo rate by 10 times in the past 16 months in its battle to bring down prices.

"Controlling inflation is a priority concern of the government," C Rangarajan, chairman of Prime Minister's Economic Advisory Council (PMEAC) told Hindustan Times.

"What started out as food inflation has become more generalised. We must use all policy instruments --- interventions in the foodgrains market and fiscal and monetary policies --- to bring down inflation to a more acceptable level," Rangarajan, a former RBI governor, said.

While not bringing down prices, the high borrowing costs, however, are hurting industrial growth. India's factory output growth in April rose 6.3 %, less than half from last year's 13.1%, mirroring signs of an imminent industrial slowdown.

A slower manufacturing sector growth will hurt corporate profitability and employment prospects in India's factories.

"We expect May industrial production to show modest improvement, but inflation is likely to rise to 9.5% in June, given the recent hike in domestic fuel prices," said Rahul Bajoria, regional economist.

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