India’s growth engine losing momentum

For India's battered stock markets, Wednesday's news wasn't good. India’s industrial growth sharply slowed to 5.3 per cent in January from 11.6 per cent in the same month last year, the government said on Wednesday, heightening fears that the impact of high interest rates on the economy could be much worse than thought earlier. Latest data from the Central Statistical Organization showed while output in the consumer durables segment in January fell 3.1 per cent from a year earlier on sluggish demand, a bigger worry emerged from a sharp slowdown in the capital goods sector that, in part, reflects the trend in new investments.

So far, government officials usually pointed to the robust growth in investment as a proof that the longer-term growth prospects of the Indian economy were in tact. But the latest data showed, capital goods grew just 2.1 per cent in January, down from a robust 16.3 per cent in the same month last year. The news came as a big dampener for the stock market, which had risen sharply in early trade, but ended the day nearly flat. "The rises in interest rates are showing up. You also have a slowdown in exports due to global developments. I think the Reserve Bank of India should now cut interest rates to ensure growth is not hurt," said Sonal Varma, economist at Lehman Brothers.

But cutting interest rates isn’t an easy task for the central bank. "For the RBI, the task is even more difficult now as inflation is rising and growth is slipping. The slowing industrial activity is a serious concern," said DK Joshi, Principal Econmist at credit rating agency Crisil.

Data released last Friday showed inflation had crossed 5 per cent mark for the first time in 10 months, and there are little indications that prices would ease in the coming weeks.

The slowdown in manufacturing prompted the government last month to scale down its economic growth forecast for the current fiscal year ending on March 31 to 8.7 per cent compared with 9.6 per cent growth a year earlier. Now many experts think even that projection could be difficult to meet, given the latest data on industrial production.