As growth in industrial production plunged to a two-year low of 1.9% in September, a senior finance ministry official today said the time has come for the Reserve Bank to "rethink" its policy of monetary tightening.
"The conventional policy of interest rates. Now you do have to rethink on that," Chief Economic Advisor Kaushik Basu told reporters here.
His comments come amid Indian corporates blaming the high interest rate regime for the decline in industrial output growth.
Industrial growth fell to 1.9% in September this fiscal from 6.1% in the year-ago period, mainly due to poor output from the manufacturing sector.
Basu's comments were, however, in sharp contrast to the views expressed by Planning Commission Deputy Chairman Montek Singh Ahluwalia, who earlier in the day said that there was no connection between a high interest rate regime and slowdown in industrial growth.
"I would not draw any connection between the rate hikes and decline in industrial production. The rate today is roughly what it was when the economy was growing at 9%," Ahluwalia said when asked if RBI's tight monetary policy was hampering industrial production.
The Reserve Bank has hiked policy rates by 3.75% since March 2010 to tame inflation, which is hovering at around 10%. The high interest rate regime has made credit expensive for corporates as well as consumers, which the industry says has hit the growth.
"The dilemma that we are facing and the RBI is facing (is that) there are two battles we have to fight -- inflation and growth. It is a really hard balancing act that the RBI has to do," Basu said.
The economic growth in the April-June period stood at 7.7%, the lowest in six quarters.
Driving at a correlation between the fiscal deficit target of 4.6% of the GDP for 2011-12 and economic growth with inflation, he termed fiscal deficit as a "double edged sword".
"If you now pull back on fiscal deficit very sharply, it has the same kind of effect as pulling down on liquidity really sharply. It curbs demand and so it is going to have an impact on growth first before it has an impact on inflation," Basu said.
He said the deficit situation is difficult and the 4.6% target may impact growth.
"Our target of 4.6% (fiscal deficit) is something that we are striving for. (It is) very hard ... To meet that target with a jarring sharp note. I am not very clear what it is going to do for the growth," he said.
