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India Reports Sharp Contraction in Production as Exports Lag

The depressed demand for goods has caught up with India's economy and it also has not brought inflation under control.
By Amiel Ungar
First Publish: 12/13/2011, 7:39 AM

Given the economic stagnation in the West, the tendency has been to regard Asia as the supplier of growth engines. Unfortunately China has reported a slowdown and now India is joining suit as the global crisis is depressing demands for Indian exports.

Indian manufacturing and export has contracted for the first time since 2009 and the Confederation of Indian Industry is warning of job losses unless the government takes action to tackle the economic retreat.

The gloomy picture is reflected by declines on the National Stock Exchange and the sorry performance of the Indian rupee. The Reserve Bank of India (RBI) was intervening in foreign exchange transactions to slow the decline of the rupee against the dollar, now that the latter has become a relative haven due to pessimism about the euro.

The Indian industrialists are lobbying for a turnaround in government monetary policy. Since December 2010 inflation has remained over 9% prompting the RBI to raise interest 13 times in the hope of bringing inflation under control. The downside is that this raises the cost of borrowing and deters fresh investment, including in infrastructure that could offer a way of creating jobs if the slump proves to be prolonged.

On the other hand, economic experts are calling upon the bank to remain steadfast in its inflation taming policy because the federal and state governments cannot be counted upon to fight inflation, leaving the RBI fighting the anti-inflation war on its own.

If the above problems were not bad enough, the Indian trade deficit is increasing because it has now been discovered that India's glowing export figures were boosted by "misclassification and errors" to the tune of $9 billion. Exports are now running behind imports, another reason for the decline in the value of the rupee.

The discovery at least put an end to one mystery: “The global economy isn’t doing well, so it was hard to understand how India was posting such fantastic export numbers,” noted  Indian economics researcher Biswajit Dhar. Mystery solved.