India Industrial Sector May Be Losing Traction Faster than Expected

While output was up 4.1% in August, it's below forecast.

India's industrial output rose by a weaker than expected 4.1% in August from a year earlier, official data showed on Oct. 12, underlining the slowing of Asia's third-largest economy.

The figures suggested India's economy, hit by a dozen interest rate hikes in 18 months and a gloomy global outlook, may be losing traction faster than anticipated due to aggressive monetary tightening.

The 4.1% rise in output from India's factories, mines and utilities was lower than the 4.5% year-on-year growth registered in August 2010 and undershot market expectations of 5% expansion.

Manufacturing grew 4.5% in August, down from 4.7% in the same month last year, as the high cost of credit forced many companies to defer expansion plans.

The data coincided with the release of a quarterly Dun & Bradstreet survey that showed business optimism down 12.1% from a year earlier and trade figures showed export growth slowing.

India's exports grew by 36.3% to $24.8 billion in September, but Commerce Secretary Rahul Khullar said "the heady numbers have gone, it is clear there is deceleration" as the global economy softens.

In August, merchandise exports, which account for 15% of gross domestic product, grew by 44.2% while in July they had rocketed by 82%.

India's economy grew by 8.5% in the last fiscal year to March 2011 and Premier Manmohan Singh said on October 11 the country will notch growth "of close to 8% this year." That projection is still robust compared to anemic Western growth, but down from an initial projection of 9%.

"The August figure was very weak," said Glenn Levine, senior economist at Moody's Analytics. "This underscores the downside risks facing the Indian economy. India's second-half slowdown may be steeper than anticipated."

Finance Minister Pranab Mukherjee called the data "disappointing."

August's industrial output performance was marginally better than July's 3.8% rise but top business leaders still voiced alarm and urged the central bank to hit the pause button in raising rates. "The deceleration in industrial growth is now clearly apparent. The central bank should pay heed and pause in its rate hikes," said Confederation of Indian Industry director general Chandrajit Banerjee.

India's chief government economic advisor Kaushik Basu has already said the central bank may have to "think out of the box" instead of raising rates again. Central bankers worldwide have been reducing lending costs to boost their economies and to shelter them from global financial turmoil. But the Reserve Bank of India has already raised rates 12 times since March 2010 -- its fastest pace ever -- and is under pressure to lift rates further.

Inflation is still stubbornly elevated at 9.78%, the highest among major global economies, and India's currency has fallen by around 10% in 2011, exacerbating price rises by making imports such as fuel costlier.

Many analysts say the bank could hike rates again at a meeting on October 25 as it tries to curb price rises in a country where the World Bank says three-quarters of the 1.2 billion population survive on less than $2 a day. Inflation has created a huge headache for the Congress-led government which relies on voter support from India's poor masses and is also reeling from a spate of corruption scandals.

Copyright Agence France-Presse, 2011

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