Indian Economy: Indian Inflation Drops to 4.39%, Industry Shrinks 2%

New Delhi, 13 Feb. The inflation

rate dropped to 4.39% the last week of January, the lowest it has been in over a year, while industrial growth has shown a rare decline, of 2%.

The low inflation can be attributed to cheaper energy prices, specifically of diesel, petrol and domestic LPG, as well as cheaper and tea and edible oils such as mustard and coconut oils. During this last week of January, diesel prices dropped by 7%, petrol prices dropped by 11% and LPG shrank by 8%. Indian manufactured foreign liquor (IMFL) became 15% cheaper, fruits and vegetables dropped 3%, and tea 1%. Cotton also became cheaper, making dhoties and sarees more affordable.

However, these price drops did not apply to rice, maize, wheat, pulses, and tobacco, which became more expensive.

Also slowing was industrial growth, despite two stimulus packages designed to generate growth. The index of industrial production (IIP) shrank again, after contracting in October 2008, the first time in 15 years.

Based on this decline, the Central Statistical Organisation is expected to modify its growth projection of 4.8% for 2008-09, while the same may be done for GDP which has been forecast at 7.1%.

The 2% industrial contraction from December is mainly due to poor manufacturing performance including consumer durables, consumer non-durables and intermediate products. A year before, in December 2007, industrial growth was at a healthy 8%.

The energy sector is expected to have grown only 1.6% in December, in contrast to 3.8% last year. Figures for mining are growth of just 1% this year compared to 5% in December 2007.

The first nine months of the 2008-09 period reported a 3.2% industrial growth rate while previous fiscal year generated 9%.

Amid all these gloomy figures of declining growth and economic troubles, the government of Prime Minister Manmohan Singh has promised to act. Kamal Nath, the Minister for Commerce & Industry, reminded citizens that there are measures being put in place. "There is Step One, then there is Step Two, and then there is Step Three," he said.

The administration has announced a stimulus package that could reach $8 billion, which is about 0.8% of the nation’ GDP, making the country’ deficit almost 10% of GDP, if all government borrowings are accounted for. Aninda Mitra, a sovereign credits analyst at Moody's, said, "This is a country with very large government debt. You can't start to expect China-style packages."

China’ recent package amounted to $568 billion while the US plan totaled $789 billion. While India’ plan is not massive, it does come on the heels of other measures taken, which include interest rate cuts and adjustments of purchase-repurchase rate and bank cash reserve ratios. These actions have freed up around $60 billion so far.

A portion of the stimulus package includes almost $1.5 billion of credit for small businesses, which will be administered by the Small Industries Development Bank. Many of the smaller businesses in India have typically relied on informal relationships and proximity to banks for credit, as opposed to a structured, centralized credit rating system. This new credit will be welcome in these family businesses which are currently cut off from banks and unable to grow.

Charles Cole, EconomyWatch.com

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Indian Economy: Indian Inflation Drops to 4.39%, Industry Shrinks 2%

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New Delhi, 13 Feb. The inflation

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