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RBI policies aggravating manufacturing sector problems: Barclays Capital

Barclays Capital said the Reserve Bank's prolonged tight monetary policy has only aggravated the problem for the manufacturing sector.

Updated: Nov 07, 2011, 06.37 PM IST
NEW DELHI:Blaming supply constraints for rising cost of manufactured items, Barclays Capital today said the Reserve Bank's prolonged tight monetary policy has only aggravated the problem for the manufacturing sector.

"Conditions for Indian manufacturing have perhaps worsened, given the RBI's prolonged tight monetary policy and the lack of liquidity in the banking sector.

In a way, Indian policy makers seem to be fighting structural inflation, mostly with cyclical tools such as hiking interest rates," Barclays Capital Research said in its 'Emerging Markets Research'.

It further said: "Supply constraints keep manufacturing prices elevated. Most of the manufacturing sector while enjoying the benefits of steady and rising demand, often faces disproportionate problems in scaling up supply due to persistent infrastructure bottlenecks."

Manufactured items, which have a share of over 65 per cent in Wholesale Price Index (WPI), have reported inflation of over 6 per cent since February this year and has been one of the major contributors of the current high inflationary pressures.

Core inflation stood at 7.69 per cent in September this year.

The Reserve Bank had earlier warned that prices of manufactured items are likely to remain high on account of volatile global commodity prices.

The Reserve Bank has hiked its key policy rates 13 times, totalling 350 basis points since March 2010, to curb inflation.

Corporate India has blamed the repeated rate hikes, which have increased the cost of borrowing, for hindering fresh investments and resultant slowdown in industrial growth.

Economic growth in April-June stood at 7.7 per cent, the lowest in six quarters. Growth in industrial production also fell to a mere 4.1 per cent in August.

Barclays said that legal and procedural impediments often present additional burdens as in the case of recent incidences of disputes over land acquisition in various parts of the country, and contribute to a widening in the demand-supply gap in the manufacturing sector.

"As a result, we think manufacturing inflation should be seen as a structural problem, rather than a cyclical issue.

"Indeed, over the past four years, inflation has often been labelled as structural, but on the fiscal front, which could help alleviate capacity constraints, little success has been achieved," Barclays said.

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