New Delhi, Apr 3 (UNI) The government's crackdown on inflation must be strategised through agriculture reforms and a comprehensive package that beefs up supplies while shunning monetary compression, an industry body Ficci said today.
''The steps will help in augmenting availability of primary articles and industrial raw materials as well as raising interest rates which run the risk of depressing industrial production further and causing stagflation,'' Ficci said in a statement.
While the decision to cut customs duties on food and essential commodities will make imports cheaper, the efficacy of these measures will be limited in the medium term, it added.
The industry body has suggested that the government needs to take action on three fronts: meeting the domestic shortfall in primary products through imports and make them available at subsidised rates for domestic consumption like in the case of petroleum products, putting in place a concerted programme for agricultural reforms and the interest rates should be lowered in order to stimulate, the manufacturing sector.
The Agricultural reforms must focus on improving the farm productivity, improve the supply of agricultural products and remove transport and other logistics constraints too reach food and other essential commodities to different regions.
In case of interest rates, monetary compression through a hike needs to be studiously avoided.
The chamber has noted that according to data available, the inflation rate of pulses is insensitive to real interest rates. This clearly implies that our policy response to inflationary apprehensions for items like pulses have to be different and need micro economic interventions by way of imports/subsidies.
The data also shows that the manufacturing sector growth responds inversely to changes in real interest rates.
The growth in the manufacturing sector output which has almost 80 per cent weight in IIP, declined to 5.9 per cent in January, against 12.3 per cent in the same month last year. This is repeat of the mid nineties when similar tight monetary policy situation led a several deceleration of manufacturing sector, Ficci said.
Overall industrial growth decelerated to 7.1 per cent in 1996-97 from 11.3 per cent in 1995-96 and further declined to 4.6 per cent in 1997-98.
''The upturn started only about three years back, however, we have again landed in a similar situation,'' the statement added.
In the last two quarters of July-September and October-December 2007, the manufacturing sector witnessed a slowdown and the main reason behind it has been the negative growth of consumer durable sector for the period April-Jan 2007-08 which is a negative 1.7 per cent as compared to 10.6 per cent for the period April-January 2006-07.
According to feedback received from its constituents by Ficci, the high interest rate charged (15-17 per cent) by banks for lending purposes has negatively impacted the profitability by 20-25 per cent as well as long-term expansion plans of these companies.
Ficci has cautioned against any further hike in the interest rates as this would adversely impact the manufacturing sector and thereby inhibit enhancement of the supplies of manufactured articles.
''The manufacturing sector on one hand is being hit by high commodity prices globally thus pushing up cost of production and on top of that high interest rates domestically have further compounded the costs. Moreover, the existing inflationary pressure is largely due to primary articles. Inflation in primary articles rose from 3.90 per cent at the end of January 2008 to 6.28 per cent on 23 February, 2008,'' the statement said.
With the drying up of the capital markets and lack of funds from global sources, the high cost of bank finance is becoming a grave concern for the industry, Ficci continued.
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