India Industrial Output Growth Slows Sharply in May

At an expansion rate of 11.5% the growth is at a more sustainable level.

India's industrial output growth slowed sharply to 11.5% in May as factories ran into capacity constraints after months of breakneck expansion, according to official data on July 12.

Analysts said the figures signaled a return to sustainable levels of industrial growth and predicted the central bank would hike interest rates again later this month to cool a still robust domestic economy.

"We expect monetary policy to continue to focus on inflation management," said Shubhada Rao, chief economist at India's Yes Bank.

The data was no cause for alarm, Rao said, even though the 11.5% growth from a year earlier was far below expectations of a 16.5% increase due to weaker manufacturing and mining production.

Officials also revised downward April's industrial output growth by more than a percentage point to 16.5%.

The government blamed the weaker numbers on capacity constraints at some companies, such as leading carmaker Suzuki Maruti, which is already producing at full capacity.

"Nobody should expect the industrial manufacturing sector will continue to grow at an abnormally high number... There are capacity constraints," Finance Secretary Ashok Chawla said.

The manufacturing sector is now showing "average growth which continues to be good and will be favorable for the economy."

Manufacturing output, which accounts for 80% of the Index of Industrial Production, grew 12.3% in May compared with 17.9% year-on-year expansion the previous month.

India's output growth figures have been boosted by the comparison effect of extremely weak production a year ago when the country was hit by the global economic slowdown.

"What we see here is industrial growth returning to much more sustainable levels," Crisil chief economist D.K. Joshi said.

With inflation running at over 10%, the central bank has raised rates three times this year -- most recently in early July -- hoping to check price rises that it said were becoming "generalized."

The government expects India's economy to grow by 8.5% this financial year to March 2011 after expanding by 7.4% last year.

The industrial output, which marked the eighth straight month of double-digit expansion, reflected growing capacity limits but not a worsening of economic sentiment, said HSBC economist Frederic Neumann.

Investment, government spending on improving India's dilapidated infrastructure and a more bountiful monsoon that will boost harvests "will keep factories running at a double-digit rate in 2010", he forecast.

Copyright Agence France-Presse, 2010

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