India’s industrial output has contracted for the first time in over two years — shrinking by 5.1 per cent in October — due to high interest rates and falling investor sentiment.
This might well force the Reserve Bank to cut the cash reserve ratio in December and later slash interest rates later, in March.
The chairman of the Prime Minister’s Economic Advisory Council, Dr C. Rangarajan, said the data was disappointing: somewhat lower industrial production growth was expected, but not negative growth. “We certainly need to look at all our actions in order to provide a situation in which the industrial growth rate is not only in the positive, but is respectably high,” said Dr Rangarajan. He said the RBI will have to look at what is happening to inflationary trends. “If the inflation trend indicates a definite decline, then perhaps (reversal) of policy actions can be thought of,” Dr Ranga-rajan added.
“The main week spot is mining, which is facing a ban in some states and there is also a delay in allocation of coal blocks. This impacts other sectors like steel and electricity,” said Mr D.K. Joshi, chief economist at Crisil, the local arm of Standard & Poor’s.
He said industrial production will remain weak in the coming months, though not necessarily negative.