The Indian industry has viewed that the frequent rate hikes by the country's central bank — a move which has hardly succeeded to in rein in spiraling inflation, would hurt the economic growth process rather than helping it.

Reacting to RBI's 50 basis points increase in both the repo rate and the reverse repo rate on Tuesday, industry body FICCI has opined that the move would made investment environment even more difficult. "We are afraid that with growth slowing down, as now admitted by the RBI, employment targets will not be achieved and this could generate greater social pressure," said FICCI Director General Dr. Rajiv Kumar.

Kumar added that the government should share a greater burden in inflation management. "Unless the government introduces significant compression on the fiscal side, RBI would remain constrained and be forced to resort to such monetary tightening in its bid to tackle inflationary expectations", he said.

According to FICCI, the government needs to focus on supply side measure such as strengthening agriculture production and productivity, removing rigidities from agriculture markets, liberalising and modernising retail, and encouraging capacity expansion by eliminating procedural impediments to control inflation without hurting growth.

Expressing similar views, another industry body, PHD Chamber also the significant monetary tightening which has been carried out since Sept’2009 has not been able to tackle the inflationary scenario.

According to the new series, it said, WPI index for the all commodities, (2004-05 prices) is hovering at an all-time-high (148 in March 2011). The year on year growth of inflation remains significantly above the RBI’s comfort zone (8.98% in March 2011).

Also, inflation in India is the highest after Russia among the BRICS economies —  9.5% in Russia, 6.3% in Brazil, 5.4% in China and 4.1% in South Africa, PHD chamber President Salil Bhandari pointed out.

In contrast, the industry body added, industry growth rate has declined sharply with IIP for the month of February registering only a 3.6% growth against 15.1 percent in the corresponding month of last year. Also, the cumulative growth is estimated at 7.8% for the Apr-Feb 2010-11 period in comparison with 10% estimated during the corresponding period last year, he said.

If such conditions continue, industrial growth may slide in the coming months too and can impact the overall GDP growth," he cautioned.

The PHD Chamber chief viewed that tight monetary policy may not always be an appropriate measure to control inflation to the full extent particularly when it is mainly due to structural supply side constraints in a fast moving economy like India.

"Government should play a critical role in relaxing the supply side constraints, if supply side constraints are not addressed in time; they can lead to a more generalised inflation going forward, even with the tight money policy," he said.

"Going forward, measures to increase agricultural output in the Union Budget 2011-12, particularly in items facing structural supply-demand imbalances, may help control inflation," he added.

Pointing out that infrastructure and agriculture sectors are facing severe shortage of investment despite  tremendous investment activity in the economy during the recent years, the PHD Chamber chief also urged the government to examine the direction of our investments.   

    * Chart prepared by the PHD Chamber of Commerce and Industry