Production data spark India growth fears

Production data spark India growth fears

Production data spark India growth fears

By James Fontanella-Khan

India’s finance minister warned that the slowdown in industrial output growth coupled with rising inflation would damage the country’s overall economic growth.

Production by manufacturing, mining and power industries grew 2.7 per cent – a 20-month low and less than expected – in November from a year earlier, the Indian government said on Wednesday. The figure is a fraction of the 11.3 per cent rise seen in October.

The data will add to the pressure on the Reserve Bank of India not to raise interest rates at its meeting on January 25. It had been expected to increase lending rates to combat spiralling inflation.

“If industrial production goes down and inflation goes up, it will have an adverse impact [on growth],” said Pranab Mukherjee, India’s finance minister. “We have to look into the data and take measures so that the growth will be high in the next four months.”

The slowdown in output is the latest bad news for Asia’s third-largest economy, with soaring food prices driving India’s inflation higher and investors fearing that the central bank will increase interest rates, a move that would tend to hinder economic growth.

“A loss of working days this November [caused by the Diwali festival season, which was in October in 2009] and unseasonal rains were expected to lower output growth this month, but the extent of the drop is a surprise,” said Sonal Varma, chief India economist at Nomura in Mumbai.

The sharp slowdown was driven by a fall in consumer goods output, which dropped 3.1 per cent year-on-year in November, and by much lower expansion in India’s manufacture of consumer durables – such as cars and household goods – which grew just 4.3 per cent compared with 30.9 per cent in October.

New Delhi expects growth of about 8.5 per cent this year, supported by stronger farm output following a good harvest. However, several economists warned that the slowdown in industrial output growth suggested the economy was cooling and warned that economic growth could fall below 8 per cent.

“I think that at this point we can say that we will inevitably see a slowdown in the Indian economy,” said A. Prasanna, chief economist at ICICI Securities in Mumbai. “We shouldn’t rule out a growth below 8 per cent in the upcoming fiscal year.”

The concerns expressed by the finance minister and economists were echoed by the main business lobbies, which have asked the government to act promptly to stimulate the economy.

“The slowdown in the manufacturing sector is indeed a cause for worry,” said Amit Mitra, secretary general of the Federation of Indian Chambers of Commerce and Industry. “We hope the finance minister will take into account the latest trend while formulating the budget and also restrain from any further monetary tightening measures.”

Despite the poor growth in industrial output, most economists expect that the RBI will still raise rates before the end of January. The Financial Times Limited 2011. You may share using our article tools. Please don’t cut articles from and redistribute by email or post to the web.