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Slowdown in Industrial Production Leads to Growth Worries

MP Rana, Sunday 18th September 2011


The current economic scenario of India presents a gloomy growth rate coupled with many other factors moving negatively. The second quarter statistics regarding GDP growth in the country have shown an expansion of just 7.7% in contrast with 9.3% experienced a year earlier for the same period. The persisting rate is way below the expectations of the planners who were expecting it to remain above 8%.


The European crisis is already giving rise to pressing situations with global markets plunging sharply and US debt ceiling has already reached its limits leading to a cut in the federal spending, which in turn is directly effecting the Outsourcing and IT business in India. This is evident from the fact that IT sector hiring in August fell by a sharp 49% as compared to the previous month. It’s not only the scenario of IT sector but other industries are also facing a steep deceleration in growth according to the recent news as the IIP (Index of Industrial Production) growth rate for August went down to a level of 3.3%, which is way below the most pessimistic expectations. The most prominent cause of concern presently is the prolonged inflation rate, which is consistently hovering around double digit mark, inspite of RBI’s strict stance of rate hikes. The 12th increase in the base rates in the month of September, 2011 again pushed the repo rate in the country by 25 basis points, to a level of 8.25%. It seems that the consistent rate hike drive by RBI is doing little to curb the inflation, and is rather having drastic effects on the Industrial production and growth due to lack of investment level in the economy. According to the recent news, petrol prices have been spiked up by Rs.3.14 a litre, due to weaker rupee against dollar and subsequent rise in the cost of energy imports, which forms the major portion of entire import bill of the country. Due to this sharp jump in petrol prices, car companies are facing a tough time meeting the shift in demand for variants running on less environment-friendly fuel i.e. diesel, and fall in sales of petrol cars; which is ultimately leading to difficulty in management of inventory.


Under the 11th plan period, we have faced situations of extreme mayhem, both on domestic as well as external front, most prominently sub-prime crisis and global recession. Given that we are already standing on the verge of decisions regarding the 12th five year plan which will be effective from 2012-13, the planning commission needs to undertake intrinsic and well thought-out policies measures for providing an armour to the domestic economy against such external slowdowns, and strengthening the overall economic structure lead by a rise in industrial production at par with the growing domestic population, most of which consists of middle class. The present scenario should play a significant role in the learning curve of our planners so that the future policies are designed in-line with the potential threats. But as of now, we are fast moving towards a situation of projected rise in unemployment, which is already being supported by high inflation rate and slowdown in overall growth, and policy makers don’t have much options left as our economy is stuck in a spiral of all these factors, which is exactly what is found in the situation of stagflation. So the question remains- are we moving towards stagflation ?

Co-authored by Somil Gupta

 
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