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RBI Hints Slowdown in Industrial Activity
Thu, 4 Feb Pre-Open

Reserve Bank of India in its sixth bi-monthly monetary policy for the fiscal year 2015-16 had highlighted the slowdown in industrial activity. The slowdown is evident from the recently published figures for 'Index of Industrial Production' for the month of November. The IIP index contracted by 3.2% in this month. Further, the earnings season for the third quarter has showed no solid signs of an uptick in the demand cycle.

To add to the woes, the quantum of stalled projects is at record high levels. The quantum of stalled projects as a percentage of those under implementation remained at around 11.8%. Such projects have been stalled on account of various issues such as problems over land acquisition, lack of clearances, lack of funds and raw material supply problems. It becomes important to revive stalled projects to free up the capital which can then be applied for productive purpose.

Further, there is a considerable slowdown in private capital expenditure. This can largely be attributed to high indebtedness and weak corporate balance sheets. Reportedly, the Mid-Year Economic Review released by the Finance Ministry shows that private capital expenditure contributed only 1% to gross domestic product (GDP) growth in April-September 2015, compared with an average 3.2% contribution in the 2004-11 period.

Considering the weak investments from the private sector space, the government will have to ramp up its spending on infrastructure activities. The flip side is that once government starts increasing public investments, simultaneously there would be pressure on the fiscal deficit levels. Thus, additional expenses on account of 'Seventh Pay Commission' coupled with increased public expenditure will force the government to re-assess its fiscal deficit targets.

Now, all eyes are on the Union Budget to assess the government's policies to boost growth and its stance on the fiscal consolidation path. RBI also recently stated that its decision to reduce interest rates will depend on the government's fiscal roadmap. The need of the hour is to strike the right balance and ensure that there are no more hurdles in ramping up infrastructure. This would be critical in ensuring a sustained high GDP and industrial growth for the country in the longer term.

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Jan 16, 2018 02:53 PM