New Delhi, May 25: FICCI today made out a case for reverting the tight monetary policy being persued by the Reserve Bank of India (RBI), saying high interest rates were choking demand and slowing down industrial production, which was down to a dismal three per cent in March 2008.
In a study on 'Slowdown in Industrial Growth and its Policy Implications', it also called for eliminating bottlenecks in important sectors relating to infrastructure such as steel, cement, mining and power. Based on findings of its primary research, the study found that companies across sectors are facing rising cost of raw materials and petroleum products, not to speak of high interest rates. In short, India is becoming a high-cost economy, which will limit the ability of the population to buy industrial goods and services.
The Chamber argued for the government to draw up a long-term policy for the entire manufacturing sector, which should be giving comprehensive guidelines and directions in terms of various parameters.
These include providing incentives and subsidies for the sector; technology development for the sector; development of sustainable raw material base; regulatory and procedural reforms; as well as directions for monetary and exchange rate management.
The study says while in the case of primary articles, the inflationary pressures are largely the result of supply shortages, price increase of manufactured products is a consequence of continuously increasing costs.
In short, FICCI argued that hike in interest rates effected to bring down inflation was counter-productive as a shortage of agricultural products was propelling prices and interest rates inflating the prices of manufactured goods.
Besides the rising interest rates, the appreciation of the Rupee has also taken a toll on industrial performance and this explains why India missed the annual export target for 2007-08 by almost five billion dollars, it added.
The Chamber is of the view that lowering of the interest rates would lead to a sustainable solution through expansion of capacity that, in turn, would ease the supply constraint, it added.
Lower interest rates would give a boost to investment activity and thereby ensure greater availability of inputs and raw materials for higher industrial and economic growth.