Why India's GDP growth slowed down

Industry lobby groups on Tuesday said the slowdown in India's GDP growth in the fourth quarter of 2010-11 was mainly on account of high interest rate regime, aimed at taming inflation.

The Reserve Bank, which has hiked key rates nine times since March, 2010 to tame inflation, has led to high borrowing costs for the industry and hit their margins.

"The disaggregated figures reveal that the growth of industrial sector has slowed down across the board. The persistent tightening of monetary policy is surely leaving an imprint on the performance of industry," said Ficci Secretary General Rajiv Kumar.

"The trend ...which is particularly evident in the Q4 figures for 2010-11 is a worrying trend," Kumar added.

On the same lines, Assocham President Dilip Modi said "tightening of monetary supply to control inflation leads to high interest rates and consequently restricts fresh investments in the infrastructure sector."

In the fourth quarter ended March, the economy grew by just 7.8 per cent due to poor performance of the manufacturing sector, as against 9.4 per cent in the same period of 2009-10.

During the quarter, growth in the manufacturing sector slowed down to 5.5 per cent from 15.2 per cent in the same quarter of 2009-10.

For the entire fiscal, however, the economic expansion was only marginally off at 8.5 per cent as against the projected 8.6 per cent. Modi said: "The manufacturing sector has not performed as expected due to low level of new investments. We must learn to live with acceptable levels of inflation. Raising interest rates is not the best way to address inflation. What we need is good infrastructure for the industry to grow fast".

Meanwhile, CII President B Muthuraman said, "Reforms need to be pursued in the areas of land and labour so that large-scale manufacturing projects can be implemented." PHD Chamber suggested the government to increase the declining share of agriculture sector in GDP as more than 60 per cent of our population is dependent on it.

"The share of agriculture in India's real GDP is continuously decelerating; it has been decelerated to 14.4 per cent in FY 2011 as compared with 14.6 per cent in FY 2010," PHD Chamber President Salil Bhandari said.

However, farm output in Q4 shot up to 7.5 per cent compared to meagre 1.1 per cent in the same period last year. The services sector, including banking and insurance, also grew 9 per cent in the March quarter, compared to 6.3 per cent in the corresponding period last year.