Used to churning out growth rates that are the envy of many peers, India’s economy is beginning to groan under the weight of domestic economic problems, including high inflation and rising borrowing costs, as well as weak global demand. One sign of this is a sharp decline in industrial production growth in December.
Broken down by group, capital goods production plunged by 16.5%, the sixth consecutive month of decline, suggesting investor sentiment is poor. Intermediate goods output also fell in December, while the growth in consumer goods production slowed to 10%.
Expansion in the manufacturing sector was particularly sluggish, dragged down by depressed business sentiment and the global slowdown. Manufacturing output (accounting for nearly 80% of overall industrial production) has been particularly volatile in recent months. It registered meagre growth of 1.8% on an annual basis in December, sharply lower than the 6.6% growth seen in November, but an improvement compared with the contraction of 5.7% in October.
Despite concerns of a flagging economy, the Reserve Bank of India will be keen to see a sustained downward trend in inflation before deciding to cut interest rates. It left its key policy interest rates unchanged in January, citing concerns over underlying inflationary pressures.
The lacklustre performance in industrial production in recent months has heightened concerns that India’s economy is losing momentum. The government recently predicted real GDP growth would slow to 6.9% in the current 2011/12 fiscal year, the slowest pace since the 2008 global financial crisis.
The economy is set to face multiple challenges in the months ahead, including weak global demand, high input costs, and the lagged impact of stringent monetary policy and rupee weakness. Without a resolution to the eurozone debt crisis or policies to resolve India’s fundamental economic problems, it is difficult to envision the economy returning to a high growth trajectory in the near term.