Of Inflation and Industrial output

Industrial output rose more than 15% for the third straight month in February, indicating that the economy does not need policy crutches to grow and prompted calls for stiff interest rate hikes to check the inflationary spiral. Low interest rates and improving employment prospects are triggering a spending boom that led to record sales of cars, motorcycles and television sets. Industrial production gained 15.1% in which mining rose 12.2% and power generation increased 6.7%, government data showed. The increasing economic activity is also pushing up commodity and asset prices that threaten future consumption and growth, if interest and tax rates do not return to normal from the crisis-induced rates. Economists expect the Reserve Bank of India governor Duvvuri Subbarao to raise policy rates by at least 50 basis points when he reviews the policy on April 20. A basis point is 0.01 percentage point. Reverse repurchase rate is at 3.5% and the repurchase rate is at 5%. Emerging economies such as India and China face the spectre of soaring inflation and high inflows overheating economies, as the Western world keeps interest rates at record low to revive their economies. In a bid to avoid interest rate spikes in the future, India and others are rolling back stimulus provided at the height of the global credit crisis in 2008 and early 2009. Inflation, as measured by the wholesale price index, is at more than one-and-a-half-year high at 9.89% for February. Food inflation increased to 17.7% for the week ended March 27. Real estate prices are near their 2008 peak. The yield on the 10-year, 6.35% government bonds maturing in January 2020 rose two basis points to 8.03%, the highest since October 2008. Even if the interest rates are raised, it may not derail growth as feared by a section of economists and corporates. The growth in February output was driven by capital goods and consumer durables, but there was a small moderation in growth from the past couple of months. Capital goods production grew 44.4% in February against a 56.2% increase in January. Consumer durable goods output growth slowed to 29.9% from a 31.6% in the previous month. But some in the government believe that the growth of the past few months are not sustainable, as demand may slow down. Part of the sharp increase in growth was also due to the low base effect, a benefit which may not be there from May. The partial withdrawal of the tax cuts may also moderate demand. The purchasing managers’ survey for March also indicates a possible slowdown in manufacturing growth from February’s 20-month peak. Out of the 17 sub-sectors in manufacturing, 14 reported positive growth, with metal products, equipment and transport items growing the fastest. The strong industrial growth is expected to help the GDP grow at 8.5% in the current fiscal and 9% in the next. The government has pegged the growth for the just concluded 2009-10 fiscal at 7.2%.