Tuesday 12 February 2008

India's Production Growth Accelerated in December

India's industrial production grew faster than economists estimated in December as record investment in factories, roads and power plants boosted demand for cement and steel.

Production at factories, utilities and mines rose 7.6 percent from a year earlier, after gaining a revised 5.1 percent in November, the statistics office said in New Delhi today. Analysts had forecast a 6.9 percent gain.

Businesses such as General Motors Corp. and ArcelorMittal are building factories in India as they bet rising incomes in the world's second-most populous nation will boost sales. Still, output may slow as nine interest rate increases since 2004 cool demand. Manufacturing is forecast to expand at the slowest pace in four months in January, according to ABN Amro Bank NV.

``The rebound in industrial output in December may be short- lived,'' said N.R. Bhanumurthy, an economist at Institute of Economic Growth in New Delhi. ``There is general weakness in industrial growth because of higher rates and the central bank may have to start cutting them at some point.''

Industrial production grew 9 percent in the nine months ended Dec. 31, less than the 11.2 percent gain in the same period in the previous year, the government said. Manufacturing in December rose 8.4 percent, led by a 16.6 percent increase in the output of capital goods such as plant and machinery.

Industrial output in China, in comparison, gained 17.4 percent in December.

Inflation, Rates

The benchmark Sensitive Index rose 1.1 percent to 16,811.49 at 12:50 p.m. on the Bombay Stock Exchange. The yield on the benchmark nine-year bond climbed 1 basis point to 7.45 percent.

Reserve Bank of India Governor Yaga Venugopal Reddy refrained from lowering rates at the Reserve Bank's last monetary policy on Jan. 29 on concern rising oil and food prices will stoke inflation. Wholesale prices, which rose 4.11 percent in the last week of January, don't reflect last year's 57 percent increase in crude oil costs.

The government on Feb. 7 said India's economy may expand 8.7 percent in the 12 months to March 31, the weakest pace in three years, because of slowing manufacturing. Growth was 9.6 percent in the last financial year.

Higher borrowing costs are prompting consumers to postpone purchases. Bajaj Auto Ltd., India's second-largest motorcycle maker, posted a 16 percent drop in sales in January, its 12th straight month of declines.

Consumption Growth

ABN Amro Bank's purchasing managers' index indicated manufacturing growth recovered in December from the previous month and fell again in January to the lowest level since September.

``One must ensure adequate growth in consumption,'' Finance Minister Palaniappan Chidambaram told reporters in New Delhi after a meeting with chairmen of state-run banks. ``Consumption drives production. Some banks have moved in that direction in the past few days and I hope others would follow.''

In response to the minister's call last month for lower rates, State Bank of India, the nation's biggest by assets, yesterday cut its benchmark prime lending rate by 25 basis points to 12.5 percent. A basis point is 0.01 percentage point.

``The cumulative impact of monetary tightening will soften industrial activity in the coming months,'' said Rajeev Malik, senior economist at JPMorgan Chase & Co. in Singapore. ``Higher capital expenditure and infrastructure spending will likely be key offsetting factors.''

Oil, Food Costs

Economists are split over whether the central bank will immediately start cutting its benchmark rate because inflation stoked by higher oil and food costs presents a threat. Six of nine economists surveyed by Bloomberg News last month said Reddy will maintain the repurchase rate at 7.75 percent, the highest in six years, in the next monetary policy statement April 29.

Prime Minister Manmohan Singh's government is spending 1.34 trillion rupees ($34 billion) in the year ending March 31, a 40 percent increase over the previous year, on roads, ports and power plants.

Companies are also expanding, encouraged by India's economic growth and on optimism rising incomes will stoke higher demand. Automakers including General Motors and Suzuki Motor Corp. are spending more than $6.6 billion to build new factories in the South Asian nation.

ArcelorMittal, the world's largest steelmaker, plans to invest $20 billion in India to set up two steel plants.

``India is an interesting place to be in at this point in time,'' said Sudhir Maheshwari, executive vice president at ArcelorMittal.

Economic expansion in India is the fastest after China among the world's biggest economies. The economy has grown an average 8.8 percent since 2003, the fastest expansion since the country's independence in 1947.

India's middle class, defined as those with annual disposable incomes between $4,380 and $21,890, has more than doubled to 50 million in the past decade, according to McKinsey & Co., the New York-based consulting firm. It estimates this group will further rise 10-fold to 583 million people by 2025.