RBI policy responsible for slow industrial growth

May 25th, 2008 - 2:21 pm ICT by admin  

New Delhi, May 25 (IANS) The tight monetary policy stance of the Reserve Bank of India (RBI) has caused a decline in industrial growth, according to a study by the Federation of Indian Chambers of Commerce and Industry (Ficci). “The tight monetary policy stance taken by the Reserve Bank of India has led to a decline in demand in the economy, affecting industrial growth which has declined from 14.8 percent in March 2007 to 3 percent in March 2008,” Ficci said in a study on ‘Slowdown in Industrial Growth and its Policy Implications’.

“In addition to rising interest rates, the appreciation of the Rupee has also taken a toll on industrial performance and this explains why India missed the annual export target for 2007-08 by almost US$ 5 billion,” the study added.

It states that while in the case of primary articles, the inflationary pressures are largely the result of supply shortages, in the case of manufactured products, it is the result of continuous cost build-up.

The study shows that companies across sectors are faced with rising costs of raw material and oil products. Addressing cost-push inflation requires measures to augment the supply of industrial raw materials and reducing the interest burden on manufacturing units.

The application of monetary tools to curb inflation is not a correct measure. A tight monetary policy would curtail growth, reduce supplies and further aggravate inflation, it said.

To prevent the situation from deteriorating further, Ficci has called for a review of RBI’s monetary policy stance and suggested reduction in interest rates to arrest the industrial slowdown. It has also recommended that the government remove bottlenecks in sectors such as infrastructure, steel, cement, mining and power to maintain the growth momentum.

“The government should draw up a long-term development policy for the entire manufacturing sector in terms of subsidies, development of raw material base, regulatory and procedural reforms as well as directions for monetary and exchange rate management to help the growth of the manufacturing sector,” the study suggests.

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