The sharp plummeting of Index of industrial production (IIP) from 16.8% in January 2010 to 3.7% in January 2011 is due to sharp deceleration in the capital goods weight in the overall IIP index, said Prime Minister?s Economic Advisory Council (PMEAC) chairman C Rangarajan. The IIP numbers have been hovering in single digit since December 2010. It was at 1.6% in December 2010 and 3.7% in January 2011.
Rangarajan said uptick in capital goods production fuelled by strong surge in exports and robust demand from infrastructure sector would lift the overall IIP numbers. ?The biggest impact on IIP was due to the decline in the production of capital goods and rebound would boost the overall numbers?, he told FE on the sidelines of the late former president Venkatraman endowment lecture at Madras School of Ecnomics. Capital goods production plunged to 18.6% in January 2011 from 57.9% in 2010.
Defending the recent policy rate hike of RBI in reining in the inflation, he said the monetary policy tightening is needed to tame the spiralling inflation. RBI hiked raised the key policy rates 8 times in the last 12 months and when asked whether one more hike is on cards, he added that RBI would take a call depending on how the inflation scenario pans out.
He dismissed that anti-inflationary bias of RBI is hurting the growth of industrial production by creating tight liquidity conditions. ?One should bear in mind that it is real rate of interest that is high and not the nominal rate of interest. The overall macroeconomic scenario with regard to inflation warrants tightening of monetary policy and RBI is taking the right step?, Rangarajan said.
Nominal rate of interest refers to rate of interest before adjustment for inflation and real interest rate points to combination of inflation and nominal rate of interest.