Leading industry chambers have urged India's central bank not to raise interest rates again after data showed that India's industrial output in December 2010 grew at its slowest pace in almost two years, rising by a modest 1.6 percent.

According official data released Friday, the index of industrial production, the barometer of the output of various sectors, rose by 1.6 percent against 18.6 percent in December 2009 , although it was in comparison to a lower base.  

Reacting to the latest IIP data, the Federation of Indian Chambers of Commerce and Industry (FICCI) has viewed that the sluggish growth partially reflects the effects of the tight monetary measures taken by the Reserve Bank of India (India) and the gradual exit from the stimulus by the government.

"The large base effect may have been one of the causes for sharp slowdown of the manufacturing sector in December, besides tight monetary policy and partial exit from the stimulus," said FICCI President Rajan Bharti Mittal.

Nonetheless, Mittal added, the growth of the manufacturing sector is moderating as is evident from the fact that machinery and equipment segment has witnessed a negative growth of 12.8 percent in December. "In the light of this sharp decline, we add a cautionary note on further tightening of monetary policy and exit from the stimulus", he added.

After raising its key interest rates six times last year, the RBI had recently raised its short-term lending and borrowing rates again to rein in rising inflation. While various industry bodies had opposed the move, Commerce and Industry Minister, Anand Sharma had also written a letter to Finance Minister Pranab Mukherjee saying that raising cost of borrowing "may not be suitable" tool to rein in inflation.

FICCI said that the key sectors like chemicals, apparels, man-made fibre textiles, consumer non-durables are not able to come-up from the low growth path for the last few months. "The budget, we hope, will try to address the issues related to slowdown in manufacturing," said the FICCI President.

While FICCI has pointed out to RBI's monetary measures and gradual fiscal tightening by the government, another industry body - the PHD Chamber has added that rising interest costs high interest rates are other major challenges for the industry.
 
"The continuous rise in prices and high interest rates has impacted the demand for consumer goods and the growth has declined to 3.9 percent in Dec2010 as compared with 10.4 percent in Dec2009. If such conditions continue, industrial growth may continue to slide in the coming months too," said PHD Chamber President Salil Bhandari.

He added that while he Q3 industrial production at 5.2 percent is much below the growth achieved in Q1 at 12 percent and Q2 at 9 percent, it is also discouraging to note that our manufacturing sector has witnessed 1 percent growth in Dec2010 as against 19.6 percent growth experienced last year in Dec2009.   

In such a situation, the PHD Chamber added, it is important that the government intervenes to arrest the slowdown in the industry sector. "There is need to ensure that credit is made available to industry at reasonable rates," it added.

The Chamber chief also urged the government to address the supply side bottlenecks in agriculture to contain inflation and the RBI to refrain from further monetary tightening.