Ahead of the RBI's review of the monetary policy, FICCI has urged the RBI to consider fine tuning the monetary policy and desist from raising interest rates any further as such a move would affect business sentiment adversely, slow down the pace of investments further and hit economic growth.
Mr Udayan Bose, Chairman of the Corporate Finance Committee of FICCI, in a communication to the RBI Governor, Dr D. Subbarao, said “Over the last two years, food inflation has remained at elevated levels. Although it is now trending downwards, it is still high and therefore a cause for concern. We have seen the central bank taking swift measures, with key policy rates being hiked nine times since March 2010, to rein in inflationary pressures.
“However, food inflation has proved to be stubbornly insensitive to any such moves. As this is largely a problem arising out of demand-supply mismatch, any move to control such inflation through monetary moves has been futile. On the contrary, aggressive monetary tightening is having an adverse bearing on economic and industrial growth of the country.”
WORRISOME TREND
FICCI pointed out that the numbers for GDP growth in the fourth quarter of 2010-11 confirmed the slowdown in sectors such as manufacturing and mining. Another worrisome trend is the slowdown in growth of Gross Fixed Capital Formation.
“The pace of investments, as you would agree, is a key determining factor for overall growth, and once it loses momentum, it is difficult to bring it back,” Mr Bose said.
Corporate India is looking for a clear direction and signposts that highlight growth enhancing measures. Recent anecdotal evidence such as slowdown in the pace of cement sales, dip in import of steel, fewer queries related to purchase of commercial vehicles, increasing inventories with automobile dealers, limited inquiries in the real estate sector have all created a negative perception and depressed the confidence level of corporate India.
SOCIAL REPERCUSSIONS
FICCI's letter to the RBI also said, “We are also aware that inflation is no longer confined to food articles alone and has become more generalised. However, the inflationary pressure emanating from manufactured products has less to do with demand side pressures and is largely the result of rising input costs. And for addressing this, we need creation of more capacities in all segments encompassing industrial raw materials.
“Unfortunately, a tight monetary policy also hits at this very objective – limiting capacity addition at a time we need it most.”
FICCI has called upon the central bank to take a fresh look at its monetary policy stance. Any more tightening of monetary policy will further destabilise industrial growth, weaken GDP growth and limit employment generation.
“Such a situation would have social repercussions as well, for we need to generate close to 12 million jobs annually and a large part of it has to come from industry particularly the SME sector.
“Single-mindedly pursuing a policy of interest rate hike could bring us closer to such a situation, which we must avoid at all costs. This is all the more important at a time when the global economy is still not completely out of the woods and there is a real danger of another slowdown,” Mr Bose added.