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LATEST NEWS UPDATES | Boom versus price puzzle

Boom versus price puzzle

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published Published on Jan 12, 2011   modified Modified on Jan 12, 2011

As policymakers gear up for their biggest battle against inflation, worrying signs about India’s boom-boom growth story emerged.

The first warning signal went up today with the government’s statistical office announcing that the index of industrial production (IIP) — the broadest measure of plant and factory performance —had grown by a piffling 2.7 per cent in November against a market consensus of 6.6 per cent.

The index stood at 317.9 —its lowest level since the financial year began on April 1.

The government has been confident that the economy will grow by 8.5 per cent this financial year that ends in March 2011. It said the November setback is just a blip, pointing to the April-November growth of 9.5 per cent against 7.4 per cent in the corresponding period last year.

“The longer term growth story is still intact,” said Planning Commission deputy chairperson Montek Singh Ahluwalia.

Finance minister Pranab Mukherjee blamed the latest data on a high base effect — a statistical skew that arose because of strong growth in November 2009. Others attributed it to a post-festive season lull in November. But the lull wasn’t visible last year.

“We shall have to look into (the reasons) and take corrective measures so that IIP numbers revive in the remaining four months,” Mukherjee said.

The November wobble will present policymakers with a dilemma: should they tamp down hard on inflation currently running at 7.4 per cent and run the risk of stalling the growth story? On the flip side, is inflation a necessary evil of the growth story — and must we learn to live with it?

Food inflation has surged to 18.3 per cent, sparking protests. The government has already flagged inflation as its biggest foe: it is committed to bringing overall inflation down to 6.5 per cent by the end of March. Assembly elections will soon follow in Bengal and four other states.

Later this month, monetary policy wonks at the RBI will hunker down to decide on inflation-busting measures that will include a much-anticipated quarter of a percentage point increase in benchmark interest rates.

It could also decide to soak up some of the roughly Rs 60 lakh crore that is swilling around in the financial system. Of this, cash in the hands of the public has swelled 20.5 per cent to Rs 8,71,897 crore from Rs 7,23,616 a year ago.

A cash mop-up operation could, however, spell trouble for industry just when it plans to open throttle in the January to March quarter, which traditionally sees the best growth numbers during the year.

Banks have already started complaining about a severe cash crunch at a time when industry has been clamouring for more credit.

Overall bank credit has swelled 23.8 per cent to Rs 37.4 lakh crore as on December 17, last year, from Rs 30.3 lakh crore a year ago.


The Telegraph, 13 January, 2011, http://www.telegraphindia.com/1110113/jsp/frontpage/story_13432622.jsp


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