No connection between high interest rate and low IIP: Ahluwalia

11 Nov 2011 Evaluate

In the midst of Indian firms blaming the high interest rate regime for the declining industrial growth, Planning Commission Deputy Chairman Montek Singh Ahluwalia said, there is no connection between the two. Commenting on the RBI's tight monetary policy hampering industrial production Ahluwalia said, 'I would not draw any connection between the rate hike and decline in industrial production. The rate today is roughly what it was when the economy was growing at 9%.'

However, for the poor industrial production, he said, there are other global and domestic factors that are affecting factory production. 'I do not think the slowing down (of industrial production growth) should be attributed to only the short-term interest rates.’

Ahluwalia’s statement followed the release of Index of Industrial Production (IIP), which plunged to 1.9% in September from 3.59% in August. Experts are of the view that the RBI’s anti inflationary monetary policy has affected the pace of industrial growth. On the other hand, apex industry body CII blamed the high interest rate regime for slowdown in IIP.

Since March 2010, the RBI has increased its key policy rates by 3.75% to control inflation, which is hovering near the two digit mark. The high interest rate regime has increased the cost of capital for corporates and consumer, which the industry says has affected the growth. Industrialist are of the view that decline in industrial output reflects the impact of RBI’s interest rate hike, high inflation and slowdown in global economy.

However, giving stress on the need to make sure that growth is revived in the next financial year; he said 'we have to make sure that in the next year the economy recovers from what is clearly a slower growth phase in the current year.'

On whether RBI would go in for another round of rate hike as inflation was still high, Ahluwalia said, ‘I think, as of now, actions taken have been commensurate with the objective of trying to bring inflation under control. Looking forward, I do not want to speculate.’ The RBI in its last monetary policy review had indicated that it may not go for another hike as it expects inflation to moderate from December.

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