» 07/13/2011 17:28 INDIA As India's industrial growth declines, so does consumption Government action to tame inflation might discourage industrial investments. Inflation rises and could top the rate of economic growth in June.
New Delhi (AsiaNews/Agencies) – The index of industrial production rose only 5.6 per cent in May from a year ago, down from 5.8 per cent in April. This represents a nine-month low. Inflation climbed faster, reaching 9.06 per cent in May, and is expected to reach double digits in June.
Many at present fear that interest rates hikes and other government action to slow inflation might discourage investments, which are crucial for growth.
The slowdown was led by manufacturing, which expanded 5.6 per cent in May, compared with a revised 6.3 per cent in April, because of a slump in investments and consumption. Manufacturing accounts for about 75.5 per cent overall industrial output.
The Reserve Bank of India is expected to raise interest rates in July for the 11th time since March 2010 to stop inflation. Rising prices of food and other basic items are especially hard on the lower classes.
Finance Minister Pranab Mukherjee said the data is "not encouraging". He added that the government is working on ways to boost the manufacturing sector's performance, but conceded that more data will have to be analyzed before a trend becomes clear. At the same, uncertainty hovers over the government, which has been weakened by a series of scandals and charges of corruption in high places.
Meanwhile, consumers have had to tighten their belts. Car sales growth dropped to a two-year low of 1.6 per cent in June, after cruising at near 30 per cent in the last two fiscal years.
Most economists expect India's GDP to expand by about 8 per cent in the current year. Manufacturing represents less than 20 per cent of GDP, and its weakening outlook is contrasted by services, which takes up more than three-fifth of GDP.
Experts note however that India cannot afford an inflation rate that is above the rate of growth. If this should occur, poverty would expand, widening the gap between the small rich elite and the hundreds of millions of Indians in the middle and lower classes who have to cope with higher consumer prices.
