Factory output has slowed down considerably since the Reserve Bank of India (RBI) started jacking up interest rates in March 2010. In the first third of 2011-12, manufacturing growth was at a sedate 6%, against a tearing 10.5% it averaged between April and July 2010. Much of this is due to companies not putting up fresh capacity in a season of rising interest rates and raw material prices. Production of equipment that goes into setting up new plants that churn out the stuff we eventually buy grew a mere 7.6% over April-July 2011, down from 23.1% in the same period a year earlier. Consumers, likewise, slowed down hire-purchase of durables from 18.4% to 4.2%. But they bought non-durables with gusto: output grew by 4.9%, compared to 3.8% a year ago. Overall, consumer goods grew 4.6%, less than half the 10% rate of April-July 2010.
The economy is slowing down, but not fast enough. The gross domestic product in April-June 2011 grew by 7.7%, which although lower than the 8.8% in the first quarter of 2010-11, keeps India trundling on a high growth trajectory as far as the rest of the world is concerned. Obviously Indians are buying more of everything from soap to software, but some sectors are feeling the pinch of rising interest rates. It costs Rs 3.25 more to borrow Rs 100 in India than it did 16 months ago. This makes life tough for anybody who borrows to manufacture anything in the country. But it’s tougher for producers that require consumers to borrow as well to buy their wares, like car makers and house builders. This pain is needed, the RBI feels, and it must spread to other parts of the economy. With wholesale inflation clocking 9.4% in April-June 2011, prices are still growing too fast and unless significantly more demand is deflated, the central bank will have little reason to change its hawkishness on interest rates.
Since Indian policymakers can do little to tame global commodity prices that are pushing up industrial input costs, demand destruction is the only tool in their kit to fight inflation. Data later this week will give a more current view of the price line and that, more than the misery of industry, will shape the RBI’s response to further monetary tightening, when it announces its mid-quarter policy stance on Friday.