The Central Statistical Organization announced that the index of industrial production (IIP) showed that industrial production grew the fastest in a decade at 12.4% in July, output in all sectors including manufacturing showed impressive growth. The good news came in with a heap of warnings from analysts who say that such good growth could prompt the Reserve Bank of India (RBI) to raise interest rates citing inflationary trends.

However, Finance Minister P. Chidambaram, citing RBI data, discounted fears of inflationary pressure from high industrial growth because non-food credit is growing at 33% with ample liquidity. Pointing out that manufacturing, textiles, man-made yarn, paper, basic chemicals and transport, posted more than 10 per cent growth, Chidambaram said “If commodity prices come down, the manufacturing growth will continue.”

Analysts disagree saying that that industrial growth momentum is strong in manufacturing, especially capital goods, due to strong investment mainly from credit. They say that this credit growth will buildup inflationary pressures inviting the RBI raise rates by 25 basis points during its October policy review. This seems more imminent because Manufacturing, which outweighs other sectors with 79% of the IIP, rose by 13.3% in July compared to 6% in July 2005.

Other analysts say that the July’s strong momentum showing was partly due to last year’s low annual growth base of 4.7% as output growth slowed in July 2005 due to floods in most-heavily industrialized western states and a fire at a key offshore oil rig.